Find out all about the different engineering loan options that can be used to meet your business needs.
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Engineering businesses span across sizes and disciplines; from independent consultancies to corporations that offer engineering services, along with the construction, operation and maintenance of facilities. The main disciplines include civil, electrical and mechanical engineering, while rapid technological developments have led to the expansion of high-tech fields like drone engineering, digital engineering and nuclear engineering.
An engineering loan can cover a wide range of expenses related to running your venture. These include:
Invest in technology
In a rapidly evolving landscape, engineering companies need to leverage technology to stay ahead of the curve. With external financing, adopting cost-heavy technologies - such as robotic automation, drones for project monitoring, wearable GPS devices and predictive analytics - can be made more accessible to small and medium enterprises.
Cover workforce expenses
Apart from covering payroll expenses, external financing can help businesses cover the costs of employee training initiatives - a necessary measure to address the widening talent gap in the engineering sector.
Purchasing engineering equipment is a cost-intensive endeavour for engineering firms - particularly when custom designed machinery and tools are required. External financing options can help cover the upfront costs if a firm lacks sufficient funds, or be used to free up capital that can be invested in other business needs - such as hiring or financing growth activities.
Transition towards green practices
There’s no denying sustainability’s rising importance; with stringent climate change agreements, growing demand for green practices and a greater focus placed on a company’s sustainability performance, it is essential that engineering firms to take steps towards implementing environmentally friendly initiatives. Some examples of these initiatives include energy-efficient systems, LEED certifications, carbon reduction solutions and waste reduction programs.
Fund growth and expansion activities
Having a lack of working capital to fund large scale projects is a common problem faced by small engineering businesses. Due to the nature of the projects, firms often require plenty of cash flow to cover the project costs and payroll expenses before payment is received.
KDM Engineering is a case in point; founder Kimberly Moore shared that the company had secured a seven-figure contract, but “didn’t have the capital to sustain the initial hiring payroll and equipment costs” due to smaller profits and projects it had garnered previously. In such situations, traditional lenders may sometimes consider your venture to be too new to lend to - as was the case for Moore - so you may have to look into financing options from alternative lenders.
Medium term and long term loans
The definitions may vary, but in general, medium term loans are financing options set to be repaid within a year, while the repayment period of long term loans is three years. These loans offer lower fixed interests relative to other types financing options, as well as smaller monthly repayments.
Common uses for these types of loans include investing in long-term tangible pieces of property (otherwise referred to as PP&E - Property, Plant and Equipment), covering the costs of hiring new employees or financing expansion projects.
Asset leasing and hire purchase agreements
A lease refers to an arrangement between the lessor (owner) and the lessee (user of the asset), where the lessor purchases an asset for the use of the lessee, in exchange for lease payments. Repayments and interest rates are fixed for the duration of the lease, and the equipment is returned to the lessor at the end of the lease.
In a hire purchase agreement, the hirer (user of the asset) makes payments to the vendor for the use of the asset. The hirer is required to pay an initial installment, and the remainder (along with the interest) is paid over over the duration of the agreement. At the end of the agreement, the hirer has the option of acquiring ownership of the asset.
Unsecured and secured loans
With secured loans, borrowers are required to put up assets as collateral for the loan. Should the borrower default on the loan, the lender may sell off the assets to recover the amount owed. Secured loans typically obtained by engineering business include equipment financing and term loans.
In contrast, borrowers don’t have to put up assets on the line to obtain an unsecured loan. Instead, these loans are approved based on factors such as a borrower’s business credit score and strength of cash flow. A line of credit is an example of an unsecured loan used by engineering firms.
Line of credit
A line of credit, also commonly known as revolving credit provides borrowers with access to a pre-approved sum of capital. Think of it as a credit card, where you can draw from as and when you need, and interest is charged only on the amount that is drawn. Flexible and versatile, it’s a financing option that can cover a variety of short term business needs. These include cash flow gaps due to seasonalities, unexpected repair costs or payroll expenses.
Be prepared to present your business in a non-technical manner
It’s likely that your potential lender won’t have an in-depth understanding of the nature of your business nor the types of engineering services that you offer, so it’s best to avoid using technical jargons or diving deep into the details of your projects.
Keeping it simple is key; use layperson's’ terms where possible, and include simple graphics or pictures if you need to elaborate on complex concepts.
Manage your online reputation
Your online presence is a way to show potential lenders that you business is a reliable and trusted authority - and managing it effectively can give you a leg up in your engineering loan application. Here are some actions steps you can implement:
Be responsive:Being responsive on social media, as well as addressing online reviews - in particular negatives ones - demonstrates that you’re committed towards fostering a positive relationship with your customers, and will quickly take steps to rectify situations to set things right.
Be a thought leader: Publishing opinion, well-written pieces, networking with influencers in your industry and participating in community events are strategies that can help establish you as an expert in your field - and will convey to potential lenders that your company is a reputable venture capable of making timely, consistent repayments.
Stringent lending requirements, such as having an operational history of three years, along with a minimum annual revenue of at least $200,000 are typically imposed by traditional lenders. For example, having a short trading history may result in a decline for your loan application - even if you’ve demonstrated a healthy profit and have a sound business plan and repayment strategy to support your application.
With the odds stacked up against them, small businesses are increasingly turning to online lenders for external financing. With Aspire, loan application processes are convenient, streamlined and speedy - submitting an application takes a matter of minutes, and you’ll be notified of your loan approval status in just 24 hours.