Find out all about equipment financing, and whether it is a good fit for your business needs.
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From getting top of the line kitchen equipment, to increasing your delivery fleet or replacing your manufacturing machinery, purchasing new equipment can help bring about significant productivity gains for your business. These purchases tend to be cost-heavy endeavours - and here’s where equipment financing comes in handy to help you obtain the tools you need without putting a dent on your cash flow.
Equipment financing can come in handy in the following situations:
Finance new equipment purchases: From cooking appliances, to medical equipment or manufacturing machinery, equipment financing can make these cost-heavy purchases possible for your business.
Fund equipment upgrades: Rapid technological advancements may render tools and equipment obsolete within a relatively short frame of time. With external financing, you’ll be able to make the necessary updates to ensure that your equipment stays up to date, and in line with market trends and consumer demands.
Preserve working capital: Equipment purchases are sizable investments - and even if you’re able to make a purchase outright, it can put your liquidity on the line. With external financing, you’ll be able to preserve your working capital, and use it to cover necessary expenses or fund more productive business activities.
Equipment repairs don’t make financial sense: Repair and maintenance costs can quickly add up - particular in situations where you find yourself making repairs for an existing equipment repeatedly - such that making a new purchase may be the more affordable option over the long run. Before sending your equipment for repairs, it helps to work out the projected costs of repair, and compare that against the costs of making a new purchase. If the latter proves to be a cheaper alternative, obtaining equipment financing to fund your purchase can be a viable option for your business.
Equipment loans are loans used to purchase new equipment, or to replace an existing one. These are self-securing loans - which means that the loans are secured by the equipment obtained, so borrowers aren’t required to present additional collateral or a personal guarantee. Equipment loans are a suitable financing option for businesses across industries - from medical practices and restaurants, to manufacturing and construction companies.
Line of credit
With a line of credit, you’ll have access to a pre-approved amount, which you can draw from repeatedly. Interest is charged only on funds that are drawn, and the amount that you repay is available to be drawn again. While a line of credit is typically used for short term business needs, it can be a suitable solution for business owners looking to purchase lower cost equipment and require financing quickly.
Term loans refer to loans that are repaid in regular payments over a set period of time. These loans may be secured or unsecured, depending on the amount that you’re borrowing. For secured loans, the equipment purchased or other business assets may be put up as collateral.
Equipment leasing isn’t a loan, but rather a long-term rental agreement where monthly payments are made to your lender over a multi-year period. You don’t make an outright purchase nor own the equipment, and at the end of the lease, you’ll have the option of returning the equipment or purchasing it at a fair market value.
Map out a detailed plan of action
Having a well-thought-out plan for the use of your funds is an effective way to build trust with your lender. Aside from showing how you plan to use the funds obtained from your loan, it can also be helpful to include supporting documents. For example, if you’re planning to use the funds for a replacement, include an invoice from your supplier, along with images of the malfunctioning equipment.
Weigh out your options
When choosing between types of equipment financing, there are several key factors you’ll need to asses to pick out a financing solution that works best for your business. Here’s a short checklist of questions that can help you better evaluate your options:
What’s the total cost of borrowing? Low interest rates can be attractive, but you’ll also need to consider other fees involved that could bring up the total cost of borrowing. These include the origination fee (an upfront fee charged by lenders to process a new loan application), as well as the maintenance fee (a fee charged on a monthly, quarterly or annual basis to cover the costs of maintaining a financing facility). What you’ll need to focus on is the APR (annual percentage rate), as it takes into account the total cost - including all additional fees - related to a loan.
What are the repayment terms? There are pros and cons to opting for a shorter or longer repayment term - and you’ll need to assess these against your financials to pick out an option that works best for your venture. For example, a shorter repayment term means you’ll pay off the debt more quickly - but you’ll also have to put up with higher monthly payments, which can put pressure on your cash flow.
What are the criterias established by your lender? The approval conditions may vary from lender to lender, so you’ll need to go through these to ascertain that you’re able to fulfill the minimum requirements for credit scores, annual revenues and business operational history. You’ll also need to take note of the terms for down payments, putting up assets as collateral, as well as policies relating to personal guarantees or liens.
How much cash do you have available right now, and will the equipment you’re obtaining soon become obsolete? This question will be relevant for business owners deciding between taking up an equipment loan or a lease. In short, if you have limited funds available for a down payment, and are looking to obtain an equipment that may quickly become obsolete, equipment leasing could be the more suitable option of the two. Do note that both financing options offer tax benefits too, so it can be helpful to consult your accountant to get an in-depth understanding of the tax incentives involved when weighing out your decision.
Obtaining equipment financing from traditional lenders is an uphill task for small businesses. Apart from being perceived as risky investments, small businesses are also often unable to meet the stringent lending criterias imposed by banks and traditional lenders - such as having a minimum operational history of two to three years, or a minimum annual revenue of $200,000.
As such, small business owners are increasingly turning to online lending platforms, where they can benefit from greater flexibility, streamlined processes and quick access to funding.