PaydayNow: How to Finance Small Business Equipment


PaydayNow: How to Finance Small Business Equipment

Commercial equipment may be rather costly. Even minor expenses, like periodic maintenance, rapidly pile up. Equipment financing is a method of easing the financial strain associated with purchasing or replacing commercial machinery.

Equipment financing is acquiring commercial equipment via the use of a loan, lease, line of credit.

“Almost any form of equipment utilized for commercial purposes may be funded,” explains Mark Kelly, senior vice president and business development manager at Univest. “All companies need equipment, whether it is for health care, industrial, construction, energy conservation, technology, titled automobiles, furnishings, or gardening.”

Here is further information regarding equipment financing to assist you in comparing your alternatives.

The Advantages and Disadvantages of Equipment Financing for Small Businesses

Pros:

  • Cash flow optimization. Financing equipment frees up funds for capital expenditures and operational costs. “In today’s economy, keeping money and cash on hand is vital,” says Steve Scott, chief operating officer of Engage PEO, a human resources outsourcing service.
  • Protect yourself against inflation. “Payments are guaranteed for the life of the loan or lease,” Kelly explains. “When future inflation is factored in, the net cost of the equipment decreases while the gross income provided by the equipment increases.”
  • Rent to own. You may own the equipment entirely or have the option to buy it at the lease’s conclusion.
  • Profit from tax benefits. In the tax year in which qualified new or used equipment is put in service, deduct the purchase amount. In 2022, you may be eligible for a deduction of up to $1,080,000.

Cons:

  • Risk of default. If a blanket lien or personal guarantee secures your loan, the lender may seize your company or personal assets if you fail. This includes the equipment for which you obtained financing.
  • A down payment is required. Depending on the kind of financing, you may be required to make a down payment of at least 20%.
  • Equipment that is no longer in use or is broken. You may wind up paying for equipment that is inoperable or ineffective for your firm.
  • Financing for fledgling firms is limited. For younger enterprises, obtaining equipment finance may be challenging. “Businesses must be formed over a while, often at least two years,” Kelly explains.

Always do a cost-benefit analysis for equipment, advises Jeff Nager, senior vice president and head of commercial finance at The Bancorp Bank. He suggests whether to acquire the equipment using corporate or personal funds.

“While this may deplete required operating cash, it prevents the firm from receiving a payout,” Nager explains. “By leasing or obtaining a loan, you may save cash and establish credit, which is critical for many small enterprises.”

How Do You Become Eligible for Equipment Financing?

Lenders have varying requirements for equipment financing.

Borrowers typically qualify if they have been in the company for at least one year, generate at least $100,000 in yearly sales, and have a credit score of at least 550 to 600, according to small-business lender BlueVine. According to the internet lending marketplace Lendio, the minimum annual revenue requirement is $50,000, a credit score of 650 or above, and at least one year in the company.

According to Paydaynow a small-business lender on a Same Day Deposit site, the most significant credit score for an equipment loan is excellent. Additionally, the lender advises that you have a strong business strategy, an updated CV, and accurate personal and company financial accounts.

What Are Your Financing Options for Equipment?

Loans on a Term

A term loan is a conventional business loan that allows you to borrow a large amount of money and return it over time at a fixed or variable interest rate, similar to a mortgage or vehicle loan. According to Funding Circle, a peer-to-peer small business lender, you may be able to borrow up to $1 million.

“A fixed-term loan has an interest rate that remains constant throughout the loan’s duration,” Kelly explains. “Because the rate does not fluctuate, the payment stays constant, facilitating the business’s budgeting process.”

According to Scott, term loans have an annual percentage rate of between 6% and 25% and a payback duration of one to five years. “Approval and finance are often completed within two working days,” he explains.

However, consider loan expenses, which may include origination, underwriting, packaging fees, and requirements for collateral or personal guarantee.

Loans for Equipment

Business equipment loans are designed exclusively for the acquisition of business equipment. A typical bank, an internet lender, or an equipment finance and leasing firm may all provide you with an equipment loan.

Scott explains that you may finance up to 100% of the equipment’s worth with an equipment loan. “The yearly percentage rate may range between 8% and 30%, with payback lasting the life of the equipment,” he explains.

You may be required to make a down payment ranging from 5% to 20% of the buying price. The advantage is that an equipment loan may be obtained quickly.

Since the equipment backs the loan, approval, and financing may occur in “as little as two business days,” Scott adds.

The equipment serves as collateral, lowering the lender’s risk and making it easier for companies to qualify.

504 Loans from the Small Business Administration

The Small Business Administration’s 504 loan program offers fixed-rate loans up to $5 million for long-term assets such as buildings, equipment, and facility renovations.

SBA 504 loans are made via certified development corporations, or CDCs, SBA-regulated and recognized community-based partners. A CDC may fund up to 40% of the loan; a third-party lender, such as a bank or credit union, may fund 50%; and the borrower may fund 10%. The SBA supports the CDC part.

Among the loan criteria are the following:

  • Operating a for-profit business in the United States or its possessions.
  • Possessing a short net worth smaller than $15 million.
  • Averaging less than $5 million in net income during the previous two years.

You may pick between ten and twenty-year payback options. Scott explains that the APR is calculated using the rate on five- and ten-year government bonds, often lower than bank rates. There will be an upfront guarantee cost and an annual service fee associated with the loan.

If you want finance immediately, this may not be the best option. Scott notes that one disadvantage of SBA 504 loans is that “approval and financing might take five to eight weeks or more.”

Line of Credit for Small Businesses

Access to a line of credit for a company offers loans money on demand instead of in one lump sum. Like a credit card, you may access cash up to your credit limit, repay, and borrow again. Interest will be levied solely on the amount borrowed.

The lender will establish a credit limit for your small company, often between $10,000 and $100,000. A blanket lien or certificate of deposit may be needed to secure a line of credit higher than $100,000.

The criteria for obtaining a company line of credit vary. According to Nav, which connects small businesses with loans and credit cards, lenders may evaluate personal and business credit ratings and financial documents, your sector, length of time in the company, and yearly income.

Scott notes that APRs may be set or variable and vary between 7% and 36%. “Approval and finance are often completed within two working days,” he explains.

Credit Card for Small Businesses

Another method of funding equipment is via a company credit card.

Compared to equipment loans or leases, business credit cards have a few benefits. Card applications take less time than loan applications, and some cards offer 0% APR and continuing cash back, miles, or points benefits.

The disadvantages of financing equipment using a small-business credit card include fewer credit limits and higher annual percentage rates compared to alternative ways. APRs vary from 11% to 24%, Scott explains.

If you do not pay your account on time, you may have far more costly equipment in the long run. Scott advises that you may want to use your company credit card to purchase less expensive equipment, such as laptops and desks, rather than massive, pricey products.

How Do I Submit an Application for Equipment Financing?

Application for an equipment loan is comparable to applying for other forms of loans.

To begin, discover and evaluate prospective lenders. However, small-business lender Fora Financial proposes that you first consider why you need this equipment and how it may affect your income, profit, and operation.

“Collaborate with the vendor, your bank, and even your accountant to determine the effect of the payments on your company,” Nager advises.

Proper timing of the purchase is critical. “Purchasing more equipment prematurely might result in considerable expenditures on an item that is not completely used,” Nager explains. “And waiting too long might result in the loss of a contract or company.”

Examine the qualifying standards and ensure that you meet them. Credit score, length of stay in the company, and income are often used criteria. Can you afford a down payment?

You may now apply, but do not apply to more than one lender at a time, as several hard credit pulls might negatively impact your personal and company credit ratings. According to JPMorgan Chase & Co., your lender will likely consider your length in operation, credit history, and company strategy.

Financing vs. Leasing of Equipment

The distinction between financing and leasing equipment is that with financing, you own the equipment until you decide to sell it. Leases provide you with access to equipment for the term of the rental agreement, with the option to return it, purchase it, or extend the lease.

Capital leases and operating leases are the two most popular forms of equipment leasing. Capital leases are used to get long-term access to a large piece of equipment, and you are responsible for its maintenance. Operating leases are for short-term rental agreements and, unlike capital leases, may be terminated before expiration.

Which sort of lease that is best for your company is determined by the equipment and the demands of your firm. If the technology you employ is continuously developing, a capital lease, also known as a fair market value lease, may be a wise option.

“FMV leases enable small firms to readily upgrade to new equipment when the lease term expires,” says Justin Tabone, senior vice president of originations for TIAA Bank’s vendor equipment financing division. “However, a financing lease may be preferable for linear accelerators. They often have a long, productive life, and small enterprises may choose to retain the equipment after the lease term expires.”

Leasing equipment may be the best option for your company if you meet the following criteria:

  • You need temporary equipment.
  • You must keep up with technological advancements regularly.
  • You’re strapped for cash.

Leasing lets you get equipment with no down payment and minimal upfront expenses, affordable monthly payments, and the ability to deduct lease payments from your taxable income. Simultaneously, you pay fees without accumulating equity in the equipment and maybe stuck into the lease for longer than the equipment required.

Financing equipment may be the best option for your company if it meets the following criteria:

  • You intend to retain the equipment for an extended time.
  • You regularly use the equipment to produce income.
  • Your business’s cash flow is healthy.

The advantages of purchasing are that you own the equipment, may sell it if you no longer want it, and take advantage of tax breaks. However, your monthly payment may be more than that of a lease, you may be required to make a sizable down payment, and obsolete equipment may be difficult to sell.

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