How a Business Can Make Use of Equipment Loans
January 03 2021
All businesses, regardless of size, will eventually require some kind of financing. Depending on the needs and purpose of the business, the type of financing required will differ from company to company. However, there is one key area that all businesses tend to spend the most money on - equipment and machinery. Having the best and most up-to-date equipment is a necessity for any company to remain competitive, produce cost effective work and maintain business continuity.
Small or medium-sized businesses cannot always afford top-shelf equipment, and often find themselves wondering what options are available to them as a solution to this problem. The best way forward is to consider equipment financing. There are several options available to see to your equipment needs. These include making an outright purchase and spreading the capital cost over a period of time, using a finance lease with the option to own at the end of the finance term, or using an operational lease to rent equipment for a specific period and then returning it to the leasing company (owner) when you are done using it.
In this article we will take a look at how business equipment loans can work for your company.
The basics of an equipment loan:
Equipment loans refer to the borrowing of funds from a financial institution to cover the capital expense of your business, regardless of the industry you are operating in. Finding the right financing plan can be tricky. Fortunately, there are many different sources you can consult to ensure that you make the best choice for your business. Traditionally, your first port of call would be a mainstream bank - preferably one you currently have a banking relationship with as they will already be familiar with your revenue, operational structures and you as an individual. This will make for a much smoother and efficient process.
When it comes to equipment loans, there are a few things that you need to be clear on before choosing a finance plan. In addition to ensuring that the bank clearly understands your investment purposes, you need to know:
What is the purpose of the loan?
What will you use it for?
How will it affect your future business performance and cash flows?
When choosing a finance plan and negotiating its terms, make sure that it covers the key factors in the structure of a loan - which are the exact time you’ll need the equipment for, the amount needed, the term and the interest rate. Remember, you never want to pay for equipment that you are no longer using - and the right finance plan will help ensure that that won’t happen.
Equipment loan options:
Once receiving the loan approval, knowing exactly what your investment needs are and having clarity on the purpose of the loan will determine what your next steps should be. The following are just a few ways that you can utilise the funds in a manner that suits the needs and purpose of your specific loan:
Outright purchase: When making an outright purchase, you will have already identified a need for new equipment that will add value to your business, sourced the supplier, agreed on machine specifications and placed a deposit. You will maintain ownership while the bank pays the full cost of the equipment to the supplier as well as take charge over the asset as their ‘underlying security’ (process called a ‘lien’). Loan payments are then made to the lender under the terms of the loan agreement until the full loan amount is paid off. At such time, your bank will then release any lien they hold on the equipment.
Equity release: Over time, you may have invested in a number of assets and paid them in full. These assets still remain in use within your business or in equipment with a long useful life and a strong residual (resale) value that remain integral to your operations. Many banks offer equipment loans to refinance existing equipment. During the valuation process, an independent assessor or valuation company will assess the value of your equipment. The bank will then determine how much they are willing to lend you based on the information provided from the valuation. This type of loan can be used for a potential investment within your business, to cover costs of a new product R&D and / or to carry out adjustments to your premises for better operational efficiency.
Outright purchase with equity release: There are instances where you may need to purchase new equipment and dispose of old units. The older equipment then gets put into remarketing channels through auctions or resale back to the original supplier. This is most ideal as it can generate a return on your original investment as equity to place against your new equipment loan. You will then have a greater deposit that can be paid to the supplier, which in turn reduces the loan amount and borrowing costs you’ll obtain through the bank.
Regardless of which option you choose, always read your contract thoroughly and verify that the terms stated are what works best for you and your business. It all comes down to picking a financing solution that suits your company and its needs, so make sure to do your homework well before moving ahead with any equipment loans.