The common saying "you have to spend money to make money" is a widely accepted knowledge. However, that is only true if you use that money properly and if you know the right way to finance your spending.
One of the most important expenditure every business need to make is capital expenditure which applies to asset heavy companies such as construction as well as service companies like accounting firms. These assets which are big ticket in nature typically only breakeven over multiple years and hence can get quite difficult to finance.
Therefore, today we will explore the kind of business financing options one might have for equipment financing.
We’ve summarized various ways to fund business equipment needs, each with pros and cons:
Pros :
As there is no need to sign into a lease or business loan and the new equipment is wholly owned. Using cash reserves to buy machinery and equipment also makes the transaction straightforward and quick. Additionally, you avoid paying interest.
Cons :
It is usually never a smart idea to pay using cash for significant business purchases since cash is a limited resource compared to credit. Businesses that solely utilize cash are restricted from accessing important resources when they are required. As another saying goes, “the best time to apply for a loan is when you don’t need it”.
Pros :
It is simple for businesses in a good financial position to get loans for a sizable acquisition. Credit gives you greater flexibility, increases your purchasing power so you may take advantage of growth possibilities and proactively upgrade your gear and equipment. Also a business term loan is typically unrestricted and you can use the cash to purchase all types of equipment, even the niche ones.
Cons :
It may take some time to submit a credit line application. It entails various preparation of bank statements, credit scoring and comprehensive paperwork such as financial statements. For businesses who might be not be ready, interest rates charged might be significantly higher if they don’t qualify for a bank loan. Even the working capital loan extended by banks has an interest starting from 7% p.a. which can be quite costly over time.
Pros :
No downpayment is required and easy on cashflow - Budgeting and cash flow management are made simpler by leasing, which offers an upfront set rate and fixed monthly payments.
Covers a wide variety of equipment - Leasing companies also work closely with you and are aware of your demands due to their know-how on the industry. This is because they have a focus on dealing with industrial machinery and work only within a standard set of equipment. These include:
1. Construction Equipment
2. Vehicles
3. Computers and office equipment
4. Manufacturing Equipment
5. Medical Equipment
No need to worry about maintenance - Another important benefit of leasing is that you do not need to worry about maintenance as the equipment is managed and maintained by the leasing company and they would be providing guarantee on them.
Cons:
Greater total cost - Depending on how the lease is set up, you can end up spending more money over time leasing equipment than you would if you bought it outright because the monthly payments includes some interest. As a result, you should determine your breakeven point and if leasing makes sense.
Required to Pay the Entire Lease – The majority of lease providers will tie you in for the entire lease's obligation. Therefore, if your company's demands change or you decide you no longer need the equipment, some may entail early termination penalties.
Lack of Ownership – Depending on the specifics of your lease arrangement, you might not have any ownership rights to the equipment at the end of the lease, as would be the case with an operational lease. If you would rather avoid the inconveniences of ownership, such as the fees related to upkeep, selling the equipment when it's no longer needed, etc., then this might not matter to you.
Ultimately, there is no single answer to your needs but at Lendingpot, we have a panel of over 45 different financiers to help get the financing need that you deserve. Get a quote today or speak to our consultants for more clarity on equipment financing.
Benjamin heads up Lendingpot with a background in all things SME. He was previously a commercial banker at Citi with experience in Relationship management, Credit Risk, Trade Operations and Corporate FX sales; and understands the difficulties SMEs face in this opaque world of SME financing.
