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What is Equipment Financing?
One issue that many small business owners face is keeping up with the expensive cost of equipment necessary to maintain their business operations. The reality for most small business owners is that having the right equipment to get the job done is essential for success, and navigating financial plans to understand the different options available is important to get your employees the resources they need. A smart business owner knows how to utilize multiple funding alternatives to bring in capital from different sources and ease the burden from any one route of funding. Equipment financing allows small business owners flexibility by extending the payment terms for large equipment purchases – instead of paying one large sum at the point of purchase, equipment financing gives owners the option to make payments over time while their business can utilize the equipment.
When looking to purchase equipment, a business owner can use operating cash flow, while they can also have the option of utilizing a variety of attractive equipment loan programs available. Whether it be for construction equipment, phone and computer systems, copiers and printers, or vehicles, there are programs available with terms that are typically better options than paying with cash. Equipment financing plans can be used to fund any kind of equipment, furniture, fixtures, vehicles, or other tools that are crucial to day-to-day operations for your small business. As a small business owner, it is important to do some research on how to finance the expenses necessary for your business to succeed. By considering different equipment financing options available for your small business and finding a lender that works well for you, you can get your business the tools it needs, often at a lower rate than traditional loan options. Generally, there are two types of equipment financing available for small business owners: equipment loans and equipment leasing.
One difference between equipment loans compared to traditional loans is that the equipment itself is used as the collateral to secure the loan amount. This is one benefit that equipment financing provides small business owners, as the emphasis for the lender is more on the value of the equipment over time than the credit history of the borrower. This makes qualification more accessible for small businesses and gives small business owners the opportunity to obtain the expensive equipment needed to get the job done when they might have not been able to afford the purchases outright.
After making all of the payments for the terms of the lease for the equipment, there are generally three options: end the terms of the lease and return the equipment, extend the terms and keep making payments to use the equipment, or most equipment leasing products include the option to buy the equipment outright from the lender. Additionally, there are added tax benefits with equipment leasing in that the monthly finance payments are often tax deductible.
What are the rates for Equipment Financing?
While rates can start as low as 5.25%, the interest rate for equipment financing is dictated by an array of factors. Like any type of financing, credit plays a role in the rates and terms that are offered, but the equipment type can play as equally as large role. As an example, fork-lifts have a long life-span and are considered great collateral for equipment lenders, while computers and phone system have to be frequently replaced, depreciate quickly, and have a very low residual value. The nature of the equipment being financed will determine the rate and value of the equipment financing program offered by different lenders.
Benefits of Equipment Financing
By using equipment financing to cover equipment expenses, your small business can reserve cash flow for other expenses and needs. Using equipment leases or equipment loans to finance equipment purchases frees up working capital and keeps other lines of credit open. When small business owners utilize equipment financing, traditional lending options are still available later – it is important for small business owners to always consider multiple avenues of capital. For example, small business owners can use a business equipment loan to purchase equipment that can be used immediately after purchase, and extend the payment for the equipment over the terms of the equipment financing loan. By using a business loan for equipment, small business owners can always maintain state-of-the-art equipment without the blow to working capital. Maintaining lower monthly payments over the terms of the financing plan frees up working capital that can be used in other places. Equipment financing increases efficiency and productivity, takes advantage of tax benefits, and preserves cash. Talk to your financial professional about how equipment financing can work for your small business.
There is also a tax benefit for small business owners that utilize equipment financing. A smart small business owners knows how to use tax breaks to their advantage. We recommend forming a strong relationship with your tax professional and doing research when choosing the right lender for your equipment financing needs. By working closely with lenders and tax professionals, you can take advantage of the tax benefits that equipment financing can offer. With an equipment loan, because you make payments throughout the terms of the loan you pay interest to the lender at the rate agreed on in the loan terms. For most equipment loan terms, the interest paid on the payments can be written off as a tax deductible – however, the total principle payment cannot be written off. There are bigger tax benefits with equipment leasing. For most equipment leasing program terms, small business owners can write off the entire lease payment as a business expense. That means the entire amount paid for the equipment can be written off by deducting the monthly lease payments. Another big tax benefit that applies to equipment leasing are the government incentives written into the tax code. According to Section 179 of the IRS Tax Code, the full amount of equipment purchases can be written off if an equipment lease is set up. Even if you do not pay the entire amount for the equipment in the year you are filing taxes for, you can deduct the entire amount on your taxes for that year.
How long can you finance Equipment for?
Equipment with long lifespans such as CNC machines or fork-lifts have high residual values and tend to receive longer lending terms, while copiers and printers have low residual values and are financed on shorter terms. As a small business owner, be sure to do your research and take advantage of the information that is available online – by searching information from lenders and other resources on the Internet, you can find out how equipment financing works, what to ask for when financing equipment, and some sites offer equipment finance calculator tools to help you figure out how to choose right financing for your equipment.
How to apply for Equipment Financing?
However, if the equipment purchase is over $200,000, there might be more financial information that could be required before closing on the deal. This process can take anywhere from 7 to 14 days due to the more thorough underwriting process, or the larger loan amount approval. Again, all of the specific details will vary from lender to lender, so if your small business is considering business equipment loans, make sure to browse the potential options available for you.
What are the best industries for Equipment Business Loans?
Financing transportation equipment can generally be expensive. Paying out of pocket is basically impossible for small business owners, which means finding the right financing plan is essential for transportation business owners. The transportation industry relies on financing to purchase trucks and trailers. There can be a lot of wear and tear on this type of equipment, and constant repairs and updates are often needed. With truck financing, transportation companies are able to purchase new equipment that requires less up-keep and is more reliable. Anytime a truck goes down for repairs or maintenance, business owners are missing out on revenue-generating opportunities. Trucks and trailers are expensive to purchase, and sometimes not attainable without financing.
One important benefit that equipment financing provides for small business owners is the flexibility to purchase new vehicles. Vehicle purchases and other transportation equipment purchase needs can easily suck up working capital from your small business. Transportation equipment financing allows you to preserve capital and expand cash flow. By saving money on the types of large purchases required for transportation, your small business can use working capital on other business expenses. Equipment financing is an attractive option for transportation because of its flexibility. The application and qualification requirements for transportation equipment are often quick and easy to get through because the equipment itself acts as collateral on the financing.
There are times when some medical companies, especially small businesses in the medical field, don’t have the proper equipment to treat their patients, and they have to refer patients to other practices. This not only makes companies look unprepared, but it also costs them potential for added revenue. Equipment financing offers medical practices flexibility to make the purchases they need to maintain high treatment standards for their patients while maintaining capital by spreading the terms of payment. Your practice can use the equipment while earning back the funds to make the payments over the terms of the equipment financing plan.
By using equipment financing, construction companies can extend the cost into longer payment terms and avoid the costly up-front expenses. This allows the construction company to preserve working capital and obtain the tools necessary to get the job done.
Restaurants and Hotels
The Hospitality industry requires constant upgrades and repairs. In the restaurant industry, especially, you need to purchase commercial ovens, refrigerators, stoves and other equipment in order to keep up with the competition and stay on top of current trends. From trends in customer preference to changes in equipment technology, there are always updated needed to keep your restaurant thriving. These are expensive purchases and can be difficult for a small business owner to sustain cash flow without the proper financing plans.
Additionally, there is a considerable amount of equipment and machinery needed for a hotel to operate efficiently. Hotels are responsible for everything from furniture, washers and dryers, and transportation vehicles. Hotels have to consistently update their equipment in order to keep up with the current trends, as well as their competition to keep guests booking rooms with them. The overhead expenses can be overwhelming and can be dramatically impact a hotel’s cash flow if there is not the proper financing plan in place. By using equipment financing, hotel owners can reduce the burden of large purchases and extend the payment out through the length of the financing terms.
Advantages to working with SMB Compass
Clients who have used Equipment Financing
Health Care Practice
One of our clients is a medical practice which had been referring some of their clients to other doctors for services that they weren’t able to provide because they did not have the medical equipment necessary to perform certain treatments and procedures. By using equipment financing to obtain the tools needed to keep those patients, our client began providing the additional services, which enabled them to capture 15% more revenue without adding new patients to their practice. In addition to the increased revenue from existing patients, they were also able to market the new services to new prospective patients. Rather than using cash from their business to purchase the equipment, SMB Compass secured an $110,000 equipment loan over 5 years. The increase in revenue quickly covered the monthly expense of the equipment, before marketing for prospective patients!