Equipment Financing For New Business: How It Works
Equipment financing for new business can take time to research and secure. There are many different types, loans, leases to take into consideration. Read on to learn more.
The cost of doing business as a newcomer can be prohibitive in specific industries. This is especially true for new companies and startups short on capital and high on ambition. Thankfully, most companies can help lower these costs quickly by choosing ways to finance the acquisition of critical assets and property, such as commercial office space, land, and equipment.
Equipment financing involves setting up a payment plan with a lender, usually in the form of a financial group, who purchase and lease the equipment to your business under favorable conditions – in the sense that it allows smaller companies and ventures to begin operating with lower capital, than if they were forced to outright buy the same equipment. Whether new or used, equipment financing is critical to getting started in construction, shipping, manufacturing, food processing, and many other industries.
For companies with considerable capital under their belt, opting to seek out equipment financing rather than outright buying new equipment can help them get the most bang for their buck, especially during the pandemic. Getting a head start can be the difference between carving out a place for yourself in the market and going under.
The Basics of Equipment Financing For New Business
To be specific, equipment financing describes the process of getting a business loan for equipment needed for certain business operations. This may vary from an office copier to an industrial oven, a delivery van, an expensive piece of laboratory equipment, or construction equipment (i.e., cement mixers, excavators, bulldozers, etc.).
On the surface, this seems like a relatively simple concept. And for the most part, it is. You can choose to get a loan or lease the equipment. You can choose what equipment you’re planning to buy, negotiate how much of the price the lender will be taking over (whether a portion or the entirety), and you can determine the length of the loan or lease with the lender.
In most cases, the lender pays the vendor for the equipment directly, without the money ever crossing through your account. Once you receive the equipment, you start making monthly payments as per the terms of your financing agreement. Should you default on the loan or lease, the lender can repossess the equipment and resell it. In cases of equipment financing, the equipment itself is the collateral.
Equipment financing typically involves either equipment leasing or equipment loaning. The main difference is whether you end up owning the equipment at the end of the term.
How Equipment Financing Works
When negotiating an equipment loan, you effectively buy the equipment with the lender’s money. They have the right to repossess the equipment as collateral if you default on your loan. But once the loan is paid off, the equipment is yours, with all the bells and whistles.
Equipment loans are an essential financing strategy for business owners with long-term prospects in the industry. Suppose you’re opening a business with the intent of running it for a decade or longer. In that case, a loan can be a helpful way to gain access to top-of-the-line equipment to begin turning a profit while investing heavily into the future of your venture.
However, in most cases, the lender will only agree to cover most of the cost. This means you might still need to front at least 10 percent of the capital for the equipment (as an example). An industrial oven used for powder coating costing about $50,000 would require you to drum up $5,000 in cash, as well as make all monthly payments on time.
The other downside is that, naturally, you will end up spending a lot more throughout the loan’s lifetime (through mandatory fees and interest rates) than if you had bought the equipment outright. But with high-cost equipment, especially in industries where a business can’t function without it, that often isn’t an option for newcomers to the industry.
However, that does not mean you should accept any loan that comes your way. As with any other loan, you need to do your research. Interest rates can vary wildly in equipment financing and may be based on the age and reputation of your business, your credit score, and specific lender preferences. Don’t be afraid to shop around for different loans and lenders before settling for an option you’re comfortable with.
Equipment leasing for new business is another form of equipment financing. It is especially popular in industries where you must change equipment frequently. An equipment lease is also typically easier to finance than an equipment loan, and some leasers give business owners the option of outright buying the equipment at a lowered price at the end of the lease.
The leasing company owns the equipment, and when the lease is over, the equipment returns to its owner. Unlike a lender specializing in loans, equipment leasing companies sometimes specialize in buying equipment for startups and new businesses to lease rather than investing in a company’s equipment purchase.
As such, you may have fewer options when attempting to lease equipment rather than seek out a loan for it. This is either because the equipment you want is only being leased out by a few select companies (reducing your options when shopping for a lease), or because there are only a few leasable choices available in your area for the kind of equipment you need.
Equipment leases may be structured in several different ways. For example, some leases are effectively loans because they offer a residual of $1 at the end of the lease as a buyout option. In this case, you would only have to pay a dollar to own the equipment you’ve been leasing. Another option is to have a 10 percent buyout at the end, with the benefit of overall lower monthly costs.
Typical Equipment Leasing for New Businesses
Equipment often leased or loaned can include:
This is perhaps the most common type of loaned and leased commercial equipment. A fleet of vehicles requires immense management costs, as well as a significant time investment.
Whether for research purposes or medical diagnostics, laboratory equipment is incredibly expensive. An MRI system will cost hundreds of thousands of dollars, and maintenance costs aren’t cheap either. Many laboratories require top-of-the-line equipment to cool or store hazardous materials, as well as sound security systems.
Whether it’s a small investment, like a cement mixer, or something far more significant like a crane, construction projects don’t get done without the right set of tools. And acquiring these machines requires either a massive amount of capital or financing.
Even a fully outfitted office can cost thousands of dollars in IT equipment alone. Not to mention the expenses of running a metalworking factory or an industrial plant.
It takes time to secure the right equipment financing for new business. Loan or lease? New or used? Have you considered wear-and-tear, or do you only need the equipment for a few months at most? Does your business even qualify for the kind of financing you need? And how good is your credit?
These are all questions you will need to answer before you start partnering with a financer.