If you own any business that utilizes heavy equipment, you are going to face the question: to lease, or to finance? Both have their pros and cons: leasing does not require any down payment and tools are easier to update, but you also may end up paying more money than the equipment is worth due to month-to-month terms. With financing, your goal is to eventually outright purchase the machinery over a period of time—you need to accept the risks involved and have satisfactory credit.
Let’s say you have decided on the latter option. Now that you are going to finance your equipment, what comes next? Many business owners apply for a loan to help with their down payments and use the equipment itself as collateral (this way, the lender takes the machinery back in case of your deal falling through). You have multiple options set before you, so here are a few tips for smart financing.
Regardless of who you borrow from, they will need to be confident in your ability to pay them back. When you apply for a loan, be ready to accurately describe how the equipment will benefit you. Equipment financing providers may wish to see your projected revenue growth and cost savings if they lend to you.
It is frustrating, but it’s true: your credit matters. You are not synonymous with your business, but your habits are an indicator of how you will manage it. Be sure that you have credit you can be proud of when you present it to a financier. Hint: review both your personal and business credit reports. If there are cumbersome errors that are not your fault, you should address those with the reporting agency immediately. Reviewing your reports also prepares you to explain any periods of inactivity or issues.
You need to shop around a bit and compare prices, terms, and other factors. There are numerous different loan types, so it is also essential to determine which one is right for you: an equipment loan if you are a new business? If you have consistent revenue, perhaps a term loan? Maybe a small business line of credit if you need something quickly?
Different sources also have different approval timelines, so you may wait weeks if you go through a bank. At Currency, we aim to approve applicants within minutes, and even if you do not meet our criteria, we will let you know.
The Small Business Administration offers several loan programs with terms you cannot find elsewhere. The Certified Development Company (CDC)/504 Program is useful for covering equipment purchases. This program is available to businesses with a tangible net worth of less than $15 million and revenues of less than five million after taxes for the previous two years. This process can indeed take a while for approval, but the SBA’s guidelines guarantee you will pay lenders back, which is beneficial if your credit is not particularly reassuring.
When you are shopping for a provider, you need to know how much a deal will cost you so that you can factor the number into your monthly budget. Heavy equipment finance rates, for example, depending on the price of the machinery, the money down, the equipment’s age, your credit histories, and how long you have been in business. Do not solely look at lenders’ timelines and interest rates, either—you want someone that you are excited to work with.
Here is a myth you might be falling for that bankers perpetuate, according to Construction Executive:
“You can’t get 100 percent financing including the tax, title, and license (TTL). Bankers don’t want to finance TTL because it is a soft cost and puts the lender in a negative equity position the minute the equipment rolls off the lot. However, you are creating a partnership with the lender—not a one-sided relationship.”
Your lender should have faith in you (not all lending is about avoiding risk, it’s about supplying you with the best terms), so if they tell you that they cannot finance your TTL, move on and look for someone who will.
One of the drawbacks of financing is that technology changes, so if your machinery becomes outdated while you are still paying for it, it’s remarkably difficult to update it. Leasing avoids this problem, so renting IT equipment is usually a smart plan. IT technology advances so rapidly that you do not want to be stuck with something that will give you a disadvantage compared to your competitors.
Equipment financing is an advantageous option for many business owners. To make it as beneficial as possible, though, you will need to be proactive and attentive regarding how you borrow.
If you have any questions regarding equipment financing costs, don’t hesitate to reach out to our Funding Specialists at Currency. We’re always available for a call at 877-358-4595, and would love to answer your questions and guide you toward the best financing option for your business.