How does equipment financing work?

How does equipment financing work?

How does equipment financing work?

As small businesses continue to rise from the ashes of the coronavirus pandemic, all signs point to a bright future for companies with well-organized priorities. Smart investments that add value to the company are critical to the company’s success, including financing the purchase of income-generating equipment.according to Equipment Leasing Financing Foundation, The recovery of economic activity in 2021 should become “a landmark year for investment in equipment and software.”

Whether you are buying equipment for a startup or upgrading a growing office, you must define your equipment needs and research your equipment Equipment financing optionsFor example, do you need short-term equipment, such as a specific project you are currently working on? Or do you think that the technology you rely on is changing so fast that equipment rental is your best choice to keep up with the pace in an affordable way?

Or maybe your needs are long-term and you think the equipment you need can add value and have revenue potential? If this is the case, you may want to consider using equipment financing to purchase machines (or machines). In many cases, this investment is well worth the time and cost.

What is commercial equipment financing?

Small business lenders understand the financial challenges business owners face when trying to grow their business. Unfortunately, not all entrepreneurs have working capital on hand or can purchase the necessary equipment to start a business or develop. Purchasing commercial equipment is a large part of the costs associated with operating a business, whether you are financing a machine for a cutting-edge technology company, a restaurant, or a small manufacturing company. Moreover, since most business owners cannot obtain sufficient funds to cover these expensive purchases, the need to explore financing options is crucial.

One Equipment loan Allow small business owners to obtain the equipment and other machinery they need without putting too much pressure on the company’s cash flow. As with all small business loans, the business obtains financing and then pays the loan within a predetermined period of time. How long you can finance the equipment depends on the loan terms. Usually, the equipment financing period is 3 to 10 years, but you can get a long-term loan for larger purchases. Then, once the loan is repaid, you have the equipment.

How difficult is it to obtain equipment loans?

Although all equipment financing lenders have their own eligibility criteria and application process, usually you can provide:

  • The credit score of your business. (Not sure if you have a commercial credit score? Before applying for financing, be sure to check with the top three credit bureaus (Experian, Dun & Bradstreet, and Equifax) to understand your score.)
  • Your personal credit score (especially for new companies)
  • Operating years
  • Down payment (A down payment is not always required, but the lender may require it.)
  • Financial Statements (Profit and Loss Statement and Balance Sheet)
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Most equipment financing lenders do not approve loans from start-ups; however, you may find some lenders willing to borrow money from new businesses. These offers usually come with stricter terms, higher down payment requirements and higher interest rates.

Business owners may also have to provide collateral as a guarantee for repayment of the loan, but in many cases, the purchased equipment may be sufficient collateral. Therefore, if the borrower defaults on the loan, the lender will assume the ownership of the equipment. In addition, the lender may require the borrower to provide a personal guarantee, which means that the lender can also purchase the borrower’s personal assets, such as houses, cars, and bank accounts.

If the lender requires you to provide a down payment, you can prepay 10% to 30% of the purchase price. In some cases, the lender will fund the total cost of the equipment, again charging higher interest rates and offering stricter terms. As with most things, details determine success or failure, so it is important to read the fine print in the loan agreement. Re-examine the documents from your lawyers and accountants to ensure that you have not misunderstood anything that might expose your business and personal assets to greater risks than you are willing to take.

How do you finance the equipment?

Finding commercial equipment financing lenders is not as difficult as you might think. Most banks, alternative lenders and equipment manufacturers provide equipment financing. The 7(a) loan program of the Small Business Administration (SBA) also provides guarantees for equipment financing. However, finding a lender that meets your requirements is another matter. The qualifications of lenders vary based on interest rates and terms. For example, Bank of America requires a company to operate for two years under the same ownership and have at least $250,000 in revenue.

Before you start researching the lender, make sure you have your backup documents ready so that there is no delay in the application process. You may not be asked to provide all this information, but it is best to keep it at hand just in case.

  • Business information: owner’s name, company address, website, social security number, and federal tax number. If your company is incorporated or a limited liability company (LLC), you may also be required to provide proof of your good standing (available from the office of the Secretary of State in your state).
  • Equipment information: Make sure to provide a detailed description of the equipment you need to finance and provide a quotation about its cost.
  • Bank statement: Most lenders want to see your company’s cash flow for at least three months.
  • Business tax return (1-3 years)
  • Income statement (recent)
  • Balance sheet (most recent)
  • Business license and/or certification
  • Reason to buy. The lender may ask you what the equipment is for and how you want the equipment to help increase sales.
  • Related additional costs: Try to control additional maintenance costs, service contracts, storage, parts, repairs, and insurance. The service provider should be able to provide you with this information.
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If you need to hire experts to run the equipment, you should predict their expected salary. The lender wants to prove that your company has completed due diligence before providing you with any funds.

Benefits of equipment financing

For small businesses, cash flow is everything. So, if you can get critical business equipment without draining your bank account, it’s definitely worth exploring. In addition, freeing up working capital allows your company to use the funds for other parts of the business, such as hiring employees or expanding marketing efforts. Here are some other advantages of equipment financing:

  • Credit score and financial history. Usually, since equipment can be used as collateral, the credit scores of owners and businesses do not have to be perfect. If traditional lenders like banks reject you, then look at fintech lenders like Fundbox. Fintech companies usually accept borrowers who are not funded by banks.
  • Less paperwork and faster processing time. Although bank loan applications may take weeks or even months to process, approve, or reject, alternative lenders that provide equipment financing can provide you with a response relatively quickly, and the payment of funds is faster.
  • New business equipment is an asset on your company’s balance sheet. However, if you rent the equipment, the machine will not be considered an asset because you do not own the machine.
  • Tax relief! Enterprise equipment owned by an enterprise can be declared as depreciation cancellation in the enterprise’s tax return. Depreciation measures the value of assets that age with wear and tear over time. Commercial equipment used to generate income meets the conditions for write-off, and the service life of the equipment is expected to be more than one year.

Finally, whether you are buying new or second-hand equipment, most lenders will provide equipment financing, so you are not restricted when looking for equipment solutions.

Can you afford new equipment?

Bearing the burden of equipment financing is a major decision and should not be made alone. Whether you own a sole proprietorship and seek the advice of an accountant, or require approval from the board of directors, it is always a good idea to evaluate any large investment loan. This evaluation process is called “Capital budget“And should be carried out when assessing whether high-cost purchases really bring value to the company.

Just as you don’t buy new real estate without weighing all the pros and cons, so does buying expensive equipment. Is there a better use for the money you spend on purchases? How soon after the purchase will the company see the return? What impact will the equipment have on the team currently operating the business? Will making this investment postpone another, more valuable purchase?

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In short, the process of capital budgeting involves the following five methods:

  • Net present value (NPV). When you determine the NPV to buy, you are calculating the value of the purchase within a certain period of time-specifically the difference between cash inflows and outflows. If the NPV of the equipment is positive, it means that by acquiring the machine, the company will generate more revenue than the final cost, even after financing.
  • 2. Internal rate of return (IRR). IRR can be used to compare two or more costly investments within a year. Like NPV, this method helps to compare the expected annual returns of different investments over a 12-month period.
  • Profit index. To determine the profitability index, you need to divide the present value of expected future cash flows by capital expenditures-financing equipment. When the profitability index of the purchase exceeds 1, it is likely to be a good investment.
  • Accounting rate of return (ARR). ARR compares the expected average income from the purchase to the amount invested-the cash flow and the specific time period are not in the equation.
  • Payback periodFinally, the payback period method determines the time it takes for capital investment such as equipment to achieve balance. For example, if the cost of a piece of equipment is US$600,000 and it can earn US$200,000 per year, the payback period is three years.
  • Use commercial credit

    In addition to loans dedicated to the purchase of equipment, your business may also want to investigate and obtain commercial credit lines. Commercial credit lines are funds that you can use when you need them, for example to buy commercial equipment. Unlike traditional loans that set monthly repayment periods, commercial credit lines allow you to borrow only the specific amount you need, and then only repay that amount. In addition, once the loaned amount is paid off, it can be borrowed again. This is called a revolving credit limit, just like a credit card.

    Commercial credit is not only a viable solution for purchasing equipment, but it will also come in handy if you have other bills to pay and are waiting for customers to pay. In addition, when your salary is due and your bank account is not available, a business line of credit is a good backup plan that can help you keep your business running.

    You can apply for a Fundbox credit line online in two simple steps. Unlike traditional commercial loan applications, you don’t need to complete any paperwork to get started, and you can make a decision right away. Contact us today!

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