Used equipment financing is ideal for businesses that require a hefty investment in reliable equipment and don’t require the latest technology.
Investing in new equipment can heavily compromise your cash flow, eat into your capital, and leave you vulnerable in times of crisis – especially during a global recession. One solution is to avoid buying equipment outright but instead to finance it in the long term.
To this end, businesses have various options to finance critical equipment, especially in industries where new equipment can be a significant cost point, such as medicine, manufacturing, construction, and more.
Seeking used equipment financing is yet another way to help drive down costs for your business – provided you find the right financing provider to work with and have an eye for a good deal.
Knowing exactly how long you might need equipment for, understanding the day-to-day costs of maintaining and repairing that equipment throughout the rest of its useful lifetime, and measuring that against the expected return on said equipment are crucial questions that need to be answered.
Furthermore, your options for seeking used equipment financing will depend heavily on your business’s financial situation, your credit history, your history with any given vendor or financier, and more.
Let’s take a closer look at what you might want to consider when opting for equipment financing as the next investment for your business – and why you should consider it in the first place.
What is Used Equipment Financing?
Equipment financing or leasing is the act of buying equipment on credit or leasing it for a time, with different terms and conditions as per the vendor and financing provider in question.
When leasing equipment, most leases shape up to be defined either as capital leases or operating leases.
Capital leases are more conducive when you might seek to claim ownership of the equipment at the end of the lease term. Throughout the lease, the equipment is temporarily considered your asset for accounting purposes.
On the other hand, operating leases count as a business expense and are used more often in cases where a business plans to regularly swap out equipment and renew their lease for different models or types of equipment over time.
When financing equipment to own it outright, the terms of the agreement are similar to a cash loan. This is except that the money received from the financing provider goes to a specific vendor for a specific piece of equipment, as agreed upon.
Equipment loans may be easier to qualify for than straight cash loans because the equipment itself serves as acceptable collateral. Businesses also have various other options to secure their loan over individuals, such as through company equity.
The older, more stable, and more profitable your business is, the better your chances of building a long-term credit relationship with a vendor or financing provider via equity.
Finally, the distinction of seeking used equipment over new equipment simply opens up your options to a much broader second-hand market, albeit one where you will have to rely on your expertise or the expertise of the person responsible for requisitions with your financing provider of choice to ensure that the used equipment you’re leasing or buying is a sound investment.
Equipment financing is not exclusively recommended to businesses low on capital. Even if you have a healthy cash flow and robust working capital, you should consider financing options for your equipment purchases rather than buying them outright. Why seek out used equipment financing options over outright buying newer or cheaper equipment? For the following reasons:
It’s Easier to Get Approved
Businesses need money to grow. You need to invest capital into your workers, equipment, product, marketing, premises, office, yourself – every aspect of business relies on good revenue and capital to function, especially if your goal is to expand over time.
This means it’s important to take note of where you’re most likely to get that money. As we’ve mentioned before, banks may be less likely to approve a cash loan for a younger business than equipment vendors because it’s easier to get collateral on an equipment lease or loan.
Because it’s easier to get approved for equipment financing, you will usually always get a better deal when looking for specific equipment versus getting a cash loan or opening a line of credit for your business. This allows you to save and build your working capital for investments that require cash.
A Good Way to Build Credit
We’ve mentioned that it’s a good deal easier to get approval for equipment financing. One way to get even better deals is to improve your credit report. The best way to do that is to continue to take on financing deals for your company, pay them off religiously, and build an excellent credit report for your business.
Another way is to build a relationship with a specific vendor or financing provider, which may help improve your rates in the future.
Save Your Working Capital
The role of working capital is to act as a wellspring for short-term expenses, cash investments, or unforeseen costs.
To facilitate long-term growth, businesses need to be liquid to a certain degree to deal with the inexplicable challenges of running a company. You don’t want to be too liquid – and having too much capital is a sign that you aren’t investing enough of it back into the business.
Finding the golden middle where you’re taking on a series of loans, paying them off in time, and making enough profit to maintain healthy working capital to survive slow seasons or weather a crisis is a good goal.
Is Used Equipment Financing the Right Choice for Your Business?
Ultimately, used equipment financing is ideal for businesses that require a hefty investment in reliable equipment and don’t necessarily require the latest technology and equipment to remain competitive. This can include manufacturing and metalworking businesses, workshops, mining, construction, and transport.
Whether you need financing for used or new equipment, it’s important to find the right financing partner for your needs.