Regardless of your business, there’s a good chance that you rely on equipment of some sort to do your job. If you’re in construction, you need cranes and trucks. If you’re a dentist you need X-ray machines. If you own a restaurant, you need commercial ovens and refrigerators. If you own a gas station, you need gas pumps and coolers for drinks and snacks.
You get the idea — practically every industry out there requires at least some sort of equipment to run properly. And any business owner will tell you that this equipment does not come cheap. Often, much of the money that comes into a business goes right back into buying, maintaining, repairing and updating equipment. But where does this money come from?
Financing Business Equipment
Just like any other part of a new or existing business, most of the money for equipment comes from financing. While the ins and outs of financing always vary depending on what is being financed and through whom, the basic process is similar to other types of financing, though it’s important to note, each type of financing has its own interest rates.
How to Finance Business Equipment
Equipment financing happens through financial institutions like banks or investment groups. In the typical financing process, you first have to figure out what your equipment needs are. This can be a dangerous step, simply because many small business owners over-estimate their needs, coming up with a list based on what they hope the future will bring, rather than what they actually need to begin with. While it’s great to dream big, you also need to remember that ultimately you’re on the hook for whatever you borrow, so it’s best not to finance more than you need. Once you have a reasonable estimate of your equipment, it’s time to price the equipment you need and to compare prices. Find the best equipment for the best deals. Tally up your total estimated costs, and then go shopping a SECOND time, this time for loans. You will need to approach your loan broker, potential investor or financial institution with a total investment, and a business plan to demonstrate repayment. If you’re an established business looking to finance repairs, maintenance or updating, the process is more or less the same. You might not be looking at purchasing brand new equipment, but you will still need an idea of how much money you need to make the repairs or updates your business requires. If you’ve bought a car or house before, then the rest is pretty straight-forward and familiar. Your overall credit worthiness will be judged based on your projected income, credit rating, amount being borrowed and other factors. If the institution decides to go ahead with the financing, they will let you know how much you can finance, and what your terms of repayment will be. At this point, you can decide to take it or leave it, but know that once you take it you are then legally responsible to meet those obligations every month.
What Are Typical Terms
For small business owners, you typically need to be able to provide a small amount of money down — about 5%. Most loans have a repayment window of 1 – 5 years, and will be financed somewhere between 6% and 9%. If you are a first-time borrower, your credit score usually has to be above 550 to even be considered for a loan. After that, your business’s history and score becomes more important.
What Are Liens?
As we said before, once you take the money you are legally obligated to pay it back according to the terms. Until that is done, the lending institution has a lien on your property. What does that mean? It means they own it. This is also similar to buying a house: until you have made the last payment on your house, your mortgage company owns a piece of that house and has a legal claim to it. With your equipment, until the terms of the loan are met, your financial institution basically owns that equipment. Should you fall behind on your payments, or should your business close, then the bank will take that equipment back as a way to pay off your debt. One nice feature of equipment loans is that the lean is against the equipment you are purchasing – if you can’t meet the terms, they claim the equipment for resale. Other types of loans put a lean on your other valuable property – your house, land, car. You get the picture. If someone offers equipment loans for a lean on your personal property, keep looking.
What About Depreciation?
Like most things, the equipment you buy is going to depreciate over time. This means that, every year, it will be worth less than the year before. This happens to just about everything — vehicles especially, but it’s not limited to that. As a business owner, you need to understand depreciation and how it can work for you. At tax time, you can actually deduct the depreciation of your items from your overall tax bill. So, if something was purchased for $100,000, but after a year it is only worth $75,000, that $25K difference can affect how much you end up owing in taxes. The more your items depreciate, the more of a write-off you can put on your taxes, and the less you end up owing. This is a good thing, but it can be complicated. There are several ways you can calculate and apply depreciation, and you want to work with a broker who can help you evaluate depreciation in relation to your overall business plan.
What if I’m denied?
If your first stop is a bank and you are rejected on an application for an equipment loan, the game’s not up. In fact, banks are more limited now than they ever have been on the criteria businesses must meet to receive a loan. But first time founders are launching all the time. How are they doing it? By working with loan brokers and private lenders to get the equipment, build the credit history and demonstrate the experience and expertise that makes them eligible for bank loans later in their business growth cycle. Our brokers have significant experience helping founders match with the right loans and the right lenders. Let’s talk about your business and your plan for equipment expansion, replacement, or repair, and we will show you what’s possible.