As businesses grow, so do their needs. Sometimes this means allocating money to specific areas, whether hiring employees, increasing advertising, retooling lines, purchasing equipment or filling other new needs. Many of these changes can require an outlay of your working capital, which in part may mean the business must take a step backward to move forward. An exception to that scenario can be the path your business takes when purchasing new pieces of equipment: turning to equipment financing rather than dipping into the company’s profits or operating capital. This form of loan offers several advantages over traditional borrowing, along with some caveats.
Equipment loans come into play when you want to add costly equipment but you are unable to pay up for it upfront. They differ from some other loans in that the equipment you are purchasing acts as the collateral for the loan because of its monetary value and inherent business utility. Because these loans are secured by hard collateral, they come with moderate risk to lenders and business owners while increasing the value of the company.
Unlike Small Business Administration Loans, individual equipment financing is geared to particular industries. A lender can focus on every imaginable area of commerce going to business equipment, medical-practice equipment, construction machinery or any combination of these and more. They are especially important means of financing in agriculture, where farming equipment can cost as much as $100,000.
Even when you have cash on hand, you likely should not drain resources when the equipment financing can be a more secure means of rebuilding your base of working capital. If you have done your due diligence regarding the return value of an expensive piece of equipment, you should find it turns a profit quickly enough that you can repay the loan before the term ends.
That last part is key. You can find yourself digging into your operating expenses if you buy equipment that does give you an appropriate return on investment. Another area of concern may be that while equipment loans can be relatively easy to secure, they are not guaranteed; your business needs to be an established entity, and your credit must be solid. It is also worth noting that the money must be used only for the specified equipment.
Directing the loan as such makes sense. Lenders know that businesses must deal with equipment obsolescence and breakage on an ongoing basis. By placing the financing focus on specific equipment purchasing, lenders can act as supportive partners in your company’s growth.
