Equipment Financing for Startup Businesses
Starting a new business can be as frightening as it is exciting. For a startup, cash may be a primary concern from the beginning. Even if you are already running a business with a steady revenue stream, unexpected equipment failures or the need to upgrade can put you on your heels. Equipment costs are and will always be significant whether you are just starting out or well into the life of your business.
All ventures, be they industrial, agricultural, tech, or services like food and beverage, rely heavily on efficient, up-to-date, quality equipment to keep the business running and continue to create revenue. A lack of adequate equipment or unexpected equipment failures could cause massive losses that no company wants to endure.
Whether you are in the planning stages of what you hope to be a thriving business one day or you have been in business for some time, there are a few options you can employ to get the equipment that will put you in the best position to grow and increase revenue. Depending on your current circumstances, equipment loans, equipment financing, equipment leasing, or equipment lease financing may work best for you and the future of your venture. A decision regarding equipment financing will require you to examine specific factors such as current cash flow, personal and business credit rating, and the age and size of your business, among others. You should give serious consideration to the pros and cons of each of these options as they pertain to the current state of your business and its needs.
Some questions that you should answer about your business include:
- What is the outright cost of your current equipment needs?
- How will you be using the equipment?
- Do you expect to use the equipment for five or more years?
- Would your current cash flow sustain an outright purchase of the equipment?
- Is there a risk of the equipment becoming obsolete before its natural end of life?
- Will the equipment be of use for many money-making applications?
- Can you afford to make a down payment of as much as 20 percent for the equipment?
- Have you done a sufficient cost-benefit analysis?
The answers to these questions, when compared to the terms of equipment loans, equipment financing, equipment leasing, or equipment lease financing should lead you to the option that will benefit you in both the short and long run.
On the surface, one of the above financing options might strike you as the way to go initially. However, as with all major business and personal financial decisions, a proper cost-benefit analysis should be done. In essence, what you need to do is compare what your monthly financing costs would be against the amount of revenue that you believe the equipment will derive. This process will be slightly more difficult if you are starting out with a brand-new business, but there are many online resources that can help you to understand what a cost-benefit analysis should entail. This example offers a simple template for a cost-benefit analysis based on a fictional company’s purchase of a stamp machine.
Cost-Benefit Analysis – Purchase of New Stamping Machine
(Costs shown are per month and amortized over four years)
Purchase of machine, includes interest and taxes: -$20,000
Installation of machine, including screens and removal of existing stampers: -$3,125
Increased revenue, net value of additional 100 units per hour, 1 shift/day, 5 days/week: $27,520
Quality increase revenue, calculated at 75 percent of current reject rate: $358
Reduced material costs by $0.82 per hundred: $1,128
Reduced labor costs of three operators’ salary plus labor o/h: $18,585
New operator, includes training and salary plus overhead: -$8,321
Power consumption increase for new machine: -$250
Insurance premiums increase: -$180
Additional floor space required: 0
Net savings per month: $15,715
This example, or something similar, can be tailored to your specific business equipment needs and used to make individualized comparisons when weighing the pros and cons of the financing options available.
An equipment loan may be in the best interest of businesses that are just getting started. Established businesses that need an expensive equipment upgrade without disrupting cash flow will also benefit from the terms of many independent loan providers. Financing equipment can allow you to retain cash to invest and grow in other areas of your business. In addition to independent equipment loan providers, banks also offer loans and extended lines of credit to business customers. However, bank loans tend to be more restrictive in their terms, have extensive application processes, and require significant collateral and high credit ratings from both the business and the owner. As with most of your equipment supply options, the pros and cons of an independent loan are relatively straightforward to understand.
Pros of equipment loans:
- 100 percent financing available with equipment as collateral
- Maintain cash flow
- Approvals in as little as 48 hours
- Don’t usually require perfect credit ratings
- Easier application processes than bank loans
- Terms easier to understand than typical lease agreements
- Own the equipment when you pay off the loan
Cons of equipment loans:
- Possible APR between 8 and 30 percent
- Payments are higher than lease payments
- Potentially lower tax savings
- Sizable down payments depending on lender
You might lean toward an equipment loan if you do not have the cash to purchase the equipment outright. If you do have the cash to buy outright but the equipment is likely to continue to benefit your business for more than five years while you use the cash to grow the business in other areas, a loan could be a good decision for the short- and long-term needs of your company.
Similar to securing an equipment loan, your equipment broker may offer in-house financing. If they do, they may be compelled, wanting to ensure the sale, to work with you on terms that you would not see with an outside source. However, keep in mind that financing through an equipment dealer will almost always require a down payment of as much as 20 percent upfront.
Pros of equipment financing:
- Potentially lower APR, graduated payments or flexible terms
- Quick approvals
- Payments lead to ownership
Cons of equipment financing:
- May require near-perfect credit
- May require at least one year in business
- Down payment required
Equipment financing through a dealer is a great option for established businesses with a stellar credit rating and ample cash flow for a down payment. The equipment depreciation and potential longevity should always be taken into strong consideration.
There are many reasons why business owners would see equipment leasing as optimal, especially if the equipment will devalue rapidly or, as in the case of computer equipment, is likely to be surpassed by new technology.
Pros of equipment leasing:
- Little to no upfront cost
- Lower monthly payments
- Payments may be 100 percent tax deductible
- Rapid funding approval
- Can renew the lease or trade up for newer equipment at end of terms
Cons of equipment leasing:
- You don’t own the equipment
- Large residual payment will be required to purchase at end of terms
Equipment Lease Financing
Article 2A of the Uniform Commercial Code refers to a special type of lease in which the owner of the equipment retains ownership and gets a complete return on initial investment while the lessee pays a monthly payment, covering costs for the owner, and is solely responsible for the upkeep and maintenance of the equipment.
Pros of equipment lease financing:
- Allows access to costly or otherwise unattainable equipment
- May be beneficial for long-term financing
Cons of equipment lease financing:
- The two-stage lease can be initially exorbitant as it is designed to benefit the lessor early on
- Lessee assumes all responsibility for equipment
Equipment lease financing is only considered a realistic option for those whose business requires large, extraordinarily expensive, or rare pieces of equipment.
The Equipment Leasing and Financing Industry
What you may not already know is that there is an entire industry that runs completely off of serving the equipment needs of today’s businesses. According to the Equipment Leasing and Finance Association, it is predicted that $1.767 trillion will be invested in equipment and software by U.S. businesses, non-profits, and government agencies. Members of the ELFA are financing everything from aircraft and medical equipment to bakery and office equipment. If you are a startup looking to lease or finance new equipment, this means that you should have more choices when it comes to lenders, allowing you to find the right fit for your business.
The Benefits of Securing an Equipment Loan Through American Business Credit
If you’re thinking of applying for an equipment loan, it’s important to work with a lender that understands your business and is equipped to meet your needs. It’s also essential to work with a lender that offers a flexible array of options. American Business Credit can help you to find both short-term and long-term loans as well as secured and unsecured loans. Our vast network of lenders enables us to cater to a wide array of businesses with varying needs, goals, and credit scores.
The application process is easy, and we can help you to secure loans of up to $1 million. We’ll connect you with suitable lenders in only minutes, and we’re here to answer your questions if you’re unsure about anything.
Before You Sign
Once you have done your due diligence, examined your cost-benefit analysis, and researched the lenders that are available to fill your needs, there are some things that you should know before you sign.
First, does your financial representative fully understand your business and its needs? If so, they can fully help you to make the most out of tax benefits, cash flow, and industry factors that could impact the success of your lease or finance.
Second, do you fully understand the terms of your lease or loan? As with all legal contracts, the language can seem unnecessarily complicated and yet vague at the same time. The devil is in the details. Be sure to pay attention to the terms surrounding the following:
- Liability for leased equipment
- Additional costs for insurance, taxes, late payment fees, or surcharges
- Making changes, upgrading, or ending a lease early
Making decisions about equipment upgrades and investments will be an ongoing process throughout the entire life of your business. All business ventures require some sort of expenditure on equipment. Everything from the acquisition of simple office and computer equipment to large costly industrial equipment can put a strain on your business. Luckily, there are several resources that you can use to investigate the purchase and financing that might be at your disposal. Factors such as the age and size of your business, your credit history, the life expectancy of the equipment that you require, and how long you expect the equipment to remain useful will affect the sort of financing agreements that you consider.