Equipment Financing: The Pros And Cons

Equipment financing is any method a business uses to fund the acquisition of equipment needed for running the business. This can range from equipment leasing, through loans tied to specified equipment, to lease-back where the business leverages an existing equipment to raise cash for additional purchases.

Equipment financing can help a business to finance up to 100 percent of the equipment it needs for its operations. Compared with a conventional credit transaction, equipment finance is also a faster and easier way to acquire such items as computers and cars, and everything in between, that are critical to running the business.

Equipment finance can be a saving grace when the business needs a crucial piece of equipment or machinery to boost its operations and generate more revenue. In such a situation, a key advantage of equipment financing is a quick access to the cash required to purchase the item. Sometimes the lender may undertake a direct delivery of the equipment through a designated supplier.

Equipment finance often involves less documentation, and closes at a faster speed, partly because it is a self-secured loan; meaning that the equipment itself serves as the security for the loan.

Another advantage of equipment finance is that the business will pay it off in regular instalments, like a normal term loan.

One disadvantage is that the equipment financed may be obsolete, or have run its productive lifetime, by the time the loan is fully repaid. In which case, the business may need to repeat the cycle as soon as it discharges its current obligation.

What qualifies a small business to make a successful application for equipment finance? While many going concerns can qualify for an equipment finance loan, the chance of success would depend on the value of the equipment, the capacity of the business to pay the principal cost and interest rate that will be charged over the life of the equipment.

In making its decision, the lender, whether a finance or non-finance institution, will also be concerned about the financial history of the business. In other words, while equipment financing may not be completely out of reach for a start-up, a business that is a going concern, and has survived some time, stands a better chance of obtaining equipment finance than one that is just starting.

Equipment financing provides an attractive option for a  relatively young business that does not have a strong rating for an affordable loan. It is an easier way to acquire high-value and value-retaining equipment without cash in hand to procure the equipment upfront.

Furthermore, lenders are more willing to take a chance on equipment financing even when the business does not have a track record of borrowing. This is because the equipment serves as collateral for the loan and provides security for the lender.

Where the business fails to payback the equipment financing loan, the lender simply carts away the equipment and liquidates for cash to recover whatever its present value can produce as a tangible asset.

To apply for equipment finance, the business will need to prove its financial health to the satisfaction of the financier. Here, the bank statements of the business will come in handy. The business will also need to provide information about the equipment it plans to purchase with the financing, and back these with documents on the features and cost of the equipment.

In deciding whether equipment financing is right for the business, the Small Business Owner must weigh the trade-off between how much more it will pay in principal and interest payments arising from the borrowing, and the opportunity cost of purchasing the equipment with its own money, thereby depleting its cash with a major one-off purchase.

If you are considering equipment finance as an option for your business, consult the SME Clinic at https://smefinance.org/sme-clinic/

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