If you run a small business it can often feel like there is less room for financial manoeuvrability and every decision could be critical to the cash flow and future prospects of the business.
That’s why when you are looking for financing help and considering your options when looking to acquire equipment for the business, you need to be sure that the decision you take is the right one for you and your company.
Here are some pointers to consider when you are looking to put a deal together for equipment financing.
Typical funding requirements
Although different lenders and financing companies will vary their lending criteria slightly the general rule of thumb is that you will typically have to find a deposit of somewhere between 10% and 20%.
If you are taking out an equipment loan the lender will invariably seek to secure the borrowing against the item itself, as security in case you default on payments. It is normal to see the lender seek out collateral for the loan as it gives them the option of taking it back if you don’t pay, to clear off some or all of what you.
Be prepared to find a deposit and to be asked to sign an agreement that offers the money in return for security in the form of collateral.
If you run a small business that is still growing and doesn’t yet have a great deal of financial strength, it could be the case that the lender might want some extra security against the loan.
This could be in the form of a personal guarantee.
Lenders always want to try and cover all the bases before they part with their money and rather than reject your loan application for business equipment because the balance sheet is not strong enough yet to justify giving you finance, a personal guarantee might be the option that gets the deal done.
Be prepared to consider this option, especially if your business is still young and doesn’t yet have a track record or significant financial strength.
Understand the costs
It is not always a good idea to buy equipment out of cash flow and reserves, even if you have the cash in the bank to do the deal.
You might want to seek out a professional opinion with regard to whether it makes sense for your business to buy outright or seek out a finance deal.
If you are looking to do a finance deal it should be remembered that there will be costs attached to that decision.
The lender will charge interest on the loan the rate you manage to get offered or negotiate and that will add to the total amount you pay for the equipment you are financing. Shop around for the best deal as the interest rate you pay could make a big difference to the total amount you pay.
Another point to consider is that the lender may charge a fee for arranging the loan. Be sure to clarify what the total cost of your borrowing will be, including what fees you have to pay upfront and for other charges, such as the early settlement of the loan.
Get a quick decision
Once you have decided that you need to acquire some new equipment for your business it is likely that you will want to get on with the deal as quickly as possible, especially if you have orders that need to be fulfilled.
The good news in that respect is that it can often be the case that you can get approved for an equipment loan quicker than you might for a more traditional business loan from your bank.
If you do need to move quickly and get a decision so that you can satisfy an order that needs your new equipment in place to meet a deadline, or fund your expansion plans, you should be able to get it done quickly with an equipment financing deal.
Keep up to date with technology
Another advantage attached to equipment financing rather than buying outright is that you can often have the flexibility to upgrade your equipment as technology changes.
Every item of equipment you own in the business will have a limited shelf life and if you have bought it outright your options could be more limited when it comes to trying to sell it in order to raise cash for the next purchase.
With a flexible finance deal, you could replace equipment with a greater degree of ease, allowing you to keep up with technology.
Potential tax advantages
This is an area where you need to get some professional assistance so that you know what your options are but there could be some potential tax advantages attached to doing an equipment financing deal.
There is a section of the IRS tax code that offers certain advantages for equipment financing that do not apply if you buy the equipment outright with cash or via a more traditional bank loan.
There is the chance that an equipment financing deal could lower your tax bill, but it’s wise to check all the details beforehand rather than make any assumptions of your own.
A viable inflation hedge
Finally, it is worth pointing out that inflation can take its toll on the value of your equipment alongside depreciation.
By deferring your payments over a period of time rather than paying cash upfront you are potentially helping to combat some of the effects of inflation by absorbing that devaluation hit in a less painful way to your cash flow.
When you sign up for an equipment financing deal you will be fixing the payments over the period of the loan agreement, so the rate you pay each month won’t change regardless of what inflation does.
Equipment financing can be an excellent way of growing your business in a cost-effective and efficient way, so look at all the options and consider whether this could be an option that helps you fulfil your expansion plans.