Whether you want to expand your manufacturing to include a new product line or your computers have seen better days, there are many reasons for today's business owner to buy new equipment.
And if the concept of equipment financing is new to you, consider that 2018 saw $1.8 trillion in equipment purchases, with 50% of these purchases being financed. That’s a huge market, but is business financing right for you?
What is equipment financing?
Unlike other types of loans, equipment financing exists for a single purpose: to finance your equipment. The equipment itself acts as the collateral. When you're done making payments, you will own the equipment free and clear. Until then, if you default on the loan, the lender can take back the equipment to help recoup their costs.
There may also be additional terms, such as guaranteeing the loan with personal assets and equity. Some lenders may ask for a blanket lien that gives them a right to any of the business’s assets needed (including the new equipment) for loan satisfaction.
Business equipment financing covers a range of business necessities, with one characteristic in common; what you’re buying is generally costly. This category of financing can cover manufacturing machinery, computers, software, farm equipment, and furnishings. When you get an equipment financing loan, you can use it only for the items designated and nothing else.
Let’s take a look at the upsides and downsides of business equipment financing, plus some alternatives.
Advantages of equipment financing
There are some major perks to this kind of financing, including:
1. FAST FUNDS
Most lenders provide the funding quickly. You can expect to have the money to buy your equipment much faster than with many other loan options.
2. FREE UP CASH
If you’re having cash flow issues, this funding option gives you a way to get the equipment you need anyway. Then you can use your incoming cash for things like your payroll or marketing budget instead of tying it up in equipment.
3. A RANGE OF PAYMENT OPTIONS
Lenders usually come to the table with a few loan term options to choose from, so you can pick a bigger payment for a shorter loan payback timeline or a small payment paid over many years.
4. BUILD ASSETS
When you’re done paying the loan, the equipment is yours. This is a big plus for a business that wants to count equipment as a permanent asset in its portfolio.
5. TAX BENEFITS
You can use your business equipment loan payment as part of your tax strategy. Qualified business expenses can help offset earnings in a big way.
Disadvantages of equipment financing
There are always two sides to any coin, and equipment financing has a few drawbacks to consider, including:
1. LIMITED USE
You can only use this loan for your equipment, so if you have a range of expansion needs, you’ll have to fund those other wish list items another way.
2. MORE EXPENSIVE
This type of financing is generally open to even those with less-than-stellar credit. Because of this, it’s a higher-risk financing tool and may have higher interest and fees compared to traditional lending.
3. YOU’RE LIABLE
In addition to paying back the loan, you are responsible for the upkeep and maintenance of the equipment. This can be expensive and a burden if you don’t have the budget. Regardless of whether your equipment runs or not, you still have to pay back the loan.
Other types of business equipment financing
There are a number of ways to pay for new equipment, and an equipment loan is just one of them. Here are some additional methods.
1. TERM LOANS
These short-term loans are available to those in higher-risk groups and may charge higher interest rates. You don’t always have to use them for equipment only, though. In fact, you can use term loans to purchase just about anything for your business, as long as the loan terminology doesn’t specify.
2. SBA FINANCING
Small Business Administration (SBA) loans are a popular option for those who can't get financing in other ways. The most notable loans are the SBA 7(a) loans and microloans. Both require a suitable credit score and for borrowers to use the funds for business-specific purposes. Amounts range from a few thousand dollars up to millions, depending on the loan category you choose.
3. LINE OF CREDIT
If you have an existing relationship with a bank, you may qualify for a line of credit. This is similar to a credit card in that you can borrow as much or as little as you need and pay it back before borrowing again. Lines of credit can be a good way to finance equipment when you buy from more than one vendor or need to finance less than what an equipment loan would require.
4. CREDIT CARDS
Credit cards are a way to pay when you want to access new equipment quickly. While the interest paid on a credit card could be significant, you may get additional perks, such as cash back or reward points. Because it’s financed on a card, you don’t have to offer additional collateral, either, making it a good option for those who don’t want to risk business or personal assets to receive approval.
5. VENDOR-SPECIFIC EQUIPMENT FINANCING
If you're brand loyal, you may find the best financing options at the company you purchase from most. For computers, software, and tech support, HP has programs that can help businesses get the tools they need fast, without an additional trip to the bank.
HP Business Boost
