Equipment Financing When You Need to Be Better Equipped
There are more than 28 million small businesses in the United States. A small business is one that has less than 500 employees. They account for about 99 percent of all businesses in the US. That is the good news. The bad news is only half of those businesses make it five years and only about 33 percent of them make it ten years. That is why equipment financing is important. It is easy to create your own small business. However, there are many difficulties when it comes to running your own business.
The most common concern for small businesses is when you need to expand in some way, but you do not have the money to do so. You may need to hire more employees, purchase materials or equipment. There are some loans available to you as a small business, including equipment financing, that may help you expand your business. Continue reading to find out more about equipment financing for your small business.
What Is Equipment Financing?
You may be a great business person and run your business like a pro, but you may not know about equipment financing. It is not something you need to know until you actually need this type of financing. However, I always feel that knowledge is power. You should have all the information so that you can make the best decision for you in that moment. In an effort to make sure you have all the information you need, I am going to start with the basic definition of equipment financing.
Equipment financing is when a lender gives you money for a piece of equipment. The loan is for the value of the piece of equipment. The equipment you are buying becomes collateral for the loan. That means if you do not make your monthly payments and default on the loan, the lender can take the piece of equipment from you. The lender determines the terms of the loan. The terms include the interest and length of the loan. You want to make sure that the piece of equipment will last longer than, or at least as long as, it takes you to repay the loan.
For example, if you need to purchase a truck for your business and the lender sets the term of the loan for 10 years, you want to make sure that the truck lasts you for 10 years.
How Is Equipment Financing Different From A Personal Loan?
A lender or personal loan finance company allows you to borrow money for any particular purpose. You do not need to purchase a piece of equipment to be able to obtain a personal loan. You can use it for any business or personal reason. For example, if you want a new kitchen, tv or audio equipment. The lender adds interest to your loan as a fee for allowing you to borrow the money. The lender determines how much money they will let you borrow and the interest rate based on your credit score. There are many different lenders available to give you a personal loan, such as traditional banks, credit unions, or online lenders. You can apply for a personal loan online and complete the application process in minutes. You can receive a response in less than 24 hours.
One of the major differences between equipment financing and a personal loan is the equipment is collateral in the financing whereas there is no collateral for a personal loan. You may not be able to get an equipment loan from just any lender. Some banks may provide you with financing for your equipment. You may also be able to obtain this type of financing through the company where you purchase the equipment. For example, you may need to purchase a John Deere tractor and you can find financing through a John Deere dealership.
Advantages Of Equipment Financing
There are many advantages of equipment financing. You should know them when determining if this is the best option for you. Typically, when you get equipment financing you get the lowest interest rate available. Once you pay off the loan, the equipment is yours immediately and you can do whatever you would like with it. You can sell it, set up a sale and leaseback, or keep it for purposes of your business. The interest that you pay your loan is tax deductible. There is also a depreciation tax that can benefit you.
It does not matter the size of your business, you can still qualify for equipment financing. When you opt to finance your equipment, you can invest in the capital of your equipment when using your cash for other purposes. This prevents you from getting your cash tied up in your equipment. You are better able to predict and forecast your cash flow when you do not use it all to pay for equipment. You do not typically have to have a down payment when you finance your equipment. There are typically no upfront costs. You can choose the length of the loan that can keep your loan payment at a reasonable rate.
When you finance your equipment, it gives you a large amount of flexibility for your money that you did not spend upfront on the equipment. It allows you to gain capital without spending all of your money at one time. You can leave your money in the bank and allow it to accrue interest. This way you are earning money on your money and it is available if you need if for something else.
Disadvantages Of Equipment Financing
Just like with most things, there is a downside to equipment financing. Before you opt for equipment financing, you should make sure you have a full understanding of the positives and negatives. You want to have all of the information when you are making a decision about financing. You may still decide this is the right choice for you, but you can do that with the complete details.
Depending on the lender, you may have to provide a down payment for the equipment. If you do have to provide some type of down payment, it may be higher than you would like it to be. While equipment loans typically offer lower interest rates, you could find yourself with a loan that has a higher rate. Lenders base your interest rate on your credit score. If you do not have the best credit score, you may find yourself with a high-interest rate.
This type of loan only allows you to purchase equipment. You cannot use it for any other reason or purpose. Depending on the life of the loan, the equipment may be outdated by the time you own it. Perhaps by the time you have the equipment paid for, you may no longer need it making it useless to you. Once you own it, you may now need to sell it or purchase another piece of equipment with another loan to replace it. You own this piece of equipment which can be a positive or a negative but I want to focus on why that might be a negative for you. When you own the equipment, you are responsible for it. If something on it breaks and needs to be repaired, you are responsible for the cost of the repair.
How Is Revolving Credit Different?
Another way you can get equipment financing is to open a line of credit. This is slightly different from actual equipment financing. Revolving credit it also referred to as a line of credit. You work with a lender and are extended a certain amount of credit, similar to a credit card. Except this, line of credit has an end date, like a personal loan would. So, the lender extends you a line of credit of $5,000 and you have it for 36 months. That means that you can use all or some of that amount of money over 36 months. You only pay back what you have used. You also only pay interest on what you have used.
Prior to using the line of credit, you sign loan documents that outline the interest rate, the amount of the line of credit and the amount of time you have to use and repay the money.
This is a flexible way to borrow money because you can use as much of it as you need and when you need it. One of the major differences between a line of credit and equipment financing is that the line of credit can be used on whatever you wish. It does not have to be used for equipment only. You also do not have any collateral associated with a line of credit. If you use it to purchase equipment and you default on the loan, the lender does not automatically take the equipment. That does not mean you will not lose the equipment in the long run, but that is a deeper article about what happens when you cannot pay any of your bills.
Are There Other Types Of Business Loans?
When you are considering equipment financing, you should shop personal loans and understand what other loans are available to you. This helps you to have a full understanding of your options so you can make the best decision. As a business owner, you have some additional loan options available to you.
One of those is a Small Business Administration (SBA) loan. Typically, you are able to borrow larger amounts of money with these types of loans. In some ways, they are similar to mortgages because they can be amounts that are that large and for up to 30 years. These loans are backed by the government agency, the Small Business Administration. They do not provide the loan. You still have to visit an approved lender for the money, however they guarantee 85 percent of the loan. That means that if you default on the loan, they pay 85 percent of it.
This type of loan is only used for business reasons. You can use it for purchasing equipment, buying other business or real estate, refinancing, or something significant for your business. With these loans, you can borrow as much as $5 million and make regular monthly payments to repay the loan. They can come with variable or fixed rate options.
The application process can take quite a long time. You may have to provide some type of collateral for this type of loan.
How Do I Know If Financing Is Right For Me?
When it comes to equipment financing or any other business loan, the bottom line to determine if it is right for you is can you afford it? You may need to expand and purchase more supplies so that your business can grow, but if you have no money coming in, you may need to find ways to increase your income. You should determine if you can make the monthly payment before you take on a loan. There are loan calculators available online. It can help you determine a good estimate of what your loan payment will be.
When you see that monthly estimate, you should take a good look at your monthly income to determine if you can pay another bill. You are the only one that can make the determination as to how this payment is going to impact your business income. You must remember that any money that you borrow must be paid back. This is a loan, not a gift and the lender always wants their money.
Where Can I Find The Loan I Need?
There are a number of lenders that offer equipment financing. Before you make your final decision on a loan, you should do some research. Do this, to see what options are available to you. A quick internet search can provide at least five lending options available to you. You should pay attention to the interest rate that the lender is offering and what type of credit score you need to be approved for a loan with them.
For example, Currency offers overall equipment loans with interest rates ranging from 6 percent to 24 percent and they want you to have a credit score of at least 585. This lender currently is offering the lowest interest rates, but that is always changeable. When you do your research, you should make sure it is current and not months old. Credibility Capital, on the other hand, wants you to have a higher credit rate of around 680 and they provide equipment loans for items that cost less than $50,000. They offer interest rates from 10 percent to 25 percent.
Should I Try To Save Money Instead?
In general, saving money is a good idea. The less money that you can borrow means the less debt you have. And the less it negatively impacts your credit score. However, with a business, it can be important to have quick access to cash for items. You need to balance your business, how often you need to have cash and what equipment financing means for you.
I am sure you know that it can take a significant amount of time to save money. If the item you need to purchase is expensive, you may not be able to save the money quickly enough. It is depending on how badly you need the equipment. Similar to deciding if you want to take on more debt, you need to decide if you should work on saving the money for the items you need, or if it is better to take on debt to obtain them. You may have to take on debt temporarily but the purchase of equipment may allow you to produce more and therefore bring in more money. This may also help you pay off the equipment faster. Again, you have to take all of the information you have to make the best decision for you. And your business at this time.
I have given you a lot of information about equipment financing to help you make the right decision for your business. Just because you can finance equipment does not mean that you should. It is an option for you to consider along with all of the other options available to you. You may take on this type of financing with a goal of earning the money each month to pay for the loan, so that basically the equipment pays for itself. That is a great goal, however, you need to stick to that goal. It is easy to spend the money somewhere else when it comes in, but you have to keep in mind that you have a goal of paying off the equipment, so you must do that first.
Julia Peoples is a long-time business manager focused on providing decision making assistance to the public. She works with people at key points of their lives who are making important retirement and financial decisions. She has had many articles published that educate the public on sound financial decision making.
Julia writes for those who are working towards financial freedom or a better understanding of how finances work. She has shared her financial insights with individuals on a one on one basis for years.