10 Benefits of Equipment Financing

All too often, business owners invest in new equipment or machinery with cash borrowed from their bank or credit card. While this might seem like the more practical approach, using financing to pay for equipment can be much more beneficial in the long run than buying outright and paying interest on top of the price tag. 

Talk to any business owner, and you’ll find that the cost of equipment plays a huge role in their ability to expand, upgrade and improve their businesses. Research from the National Association of Business Economists shows that investment in equipment was responsible for 80% of companies’ capital expenditures from 2007-2012. Equipment financing gives businesses like yours the power to get the equipment you need when you need it without putting your finances or your credit at risk.

Getting equipment financing can help you gain better access to the technologies you need to succeed in your business, whether that means purchasing new or used equipment or improving your facilities. 

What is Equipment Financing?

If you have the equipment you need to purchase and don’t want to worry about putting it on a credit card, you may want to consider taking out equipment financing. Depending on your business type, you might also qualify for an SBA loan or some other government program. The benefits of these loans are long-term low-interest rates and tax advantages. Depending on your business type, having cash upfront can be hard. With equipment financing options, you can get what you need when you need it so that there’s no hold up in getting started. Get in touch with one of our professional finance specialists today if you would like more information about how we can help put together an option that works for your company and your budget.

There are three primary options for financing a new piece of equipment: Debt, Equity, and Leasing. Each has its strengths and weaknesses as well as tax consequences

Whether you’re a small business owner or operating a large-scale operation, equipment financing is a great option. In addition to being able to obtain your entire list of necessary business assets under one contract, equipment financing makes it possible for you to acquire high-value assets even if you don’t have enough cash on hand. For example, rather than purchasing an expensive machine outright and paying off your credit card bill in full each month—you can finance your new equipment and payback interest over time. And in most cases, you don’t need perfect credit to get approved for an effective piece of equipment financing either.

Benefits of Equipment Financing

You’ve probably heard of equipment financing before and thought that it was something you might need in the future. Maybe you don’t know what it is or why you would need it, but you figured it was good to know that it exists and that maybe one day you’d find out what those benefits are. Well, today’s the day! Find out about these 10 benefits of equipment financing below, so that if and when you need to purchase new equipment, you’ll be fully prepared.

1) Immediate Cash Flow

When you need money quickly to make a down payment, equipment financing is a great way to get immediate cash flow. It’s also easy and fast to get approved for an equipment lease or loan, allowing you to get back to work more quickly. Low-Interest Rates: Rather than relying on bank loans or personal lines of credit that charge high-interest rates, businesses can lease capital at low rates through equipment financing. This makes it easier to keep costs low while keeping up with growing expenses in your business. 

2) Use Tax Benefits

While tax deductions for equipment can be a great motivator, it's important to remember that these deductions are temporary. The benefit that stays with you forever is your tax-free depreciation. For example, when you buy a $100,000 piece of equipment and depreciate it over five years at $20,000 per year (which is typical), only $20,000 will be taxable in year one. If you pay cash for that same piece of equipment, however, all $100,000 will be taxable immediately. What's more, if you have to borrow money to buy that new piece of equipment (or lease it), part or all of your interest payments may also be deductible.

3) Easier Monthly Payments

If you’re struggling to pay your business costs each month, financing equipment may be a good option for you. You can finance up to 100% of your purchase and spread out your payments over time. With lower monthly payments, you can better manage your cash flow and have more money available for other uses, such as advertising or hiring new staff. Plus, if you have any problems making those payments, it will be easier for you to arrange an extension or restructure your payment plan than if you were using a bank loan. Better Credit Score: Your credit score is one of many factors that lenders consider when approving a loan request.

4) Minimize Capital Expenses

One of the benefits of equipment financing is that you can reduce capital expenses. By purchasing a machine outright, there is a larger initial cost upfront. However, with equipment financing, you can pay for your asset over time as opposed to saving up for it all at once. This type of payment option works well if you are a start-up company and need time to develop your cash flow before purchasing an expensive piece of machinery. You should also ask about tax incentives for investing in business assets when you’re thinking about finance options. Additionally, find out if there are any government programs available that could help subsidize your payments. For example, if you are interested in buying computer hardware or software, see what Microsoft’s Volume Licensing Program has to offer.

5) Predictable Payment Schedule

One of equipment financing’s biggest benefits is that it offers predictable payments. That means you can keep your business in a healthy cash flow state by knowing exactly how much each payment will be when it will arrive, and for how long. With a typical loan, one month you may have more money than expected and another month you may have less, meaning your payments could change from month to month. Meanwhile, credit cards are only good for consumer purchases; businesses don’t have that luxury. By using equipment financing, you can put yourself in a healthy financial position without overspending.

6) Multiple Lenders to Choose From

Not all lenders offer equipment financing. By checking with several, you’ll be able to make an educated decision about which one best suits your needs. Moreover, some sellers may require a specific lender. If that’s your situation, you don’t want to miss out on purchasing because you haven’t checked into financing options. With so many choices available, it makes sense to get quotes from several sources before settling on one particular financing option.

7) Flexible Loan Terms

The benefits of equipment financing vary from business to business, but one thing is certain: Access to capital when you need it can be a game-changer. In some cases, you can get a loan after as little as 24 hours if your equipment needs are urgent. That’s because equipment financing companies don’t rely on strict underwriting standards or credit scores. Most finance providers only care that you have enough collateral and that your enterprise has sufficient cash flow to pay back your loan. That means no long-term contracts with huge penalties for canceling and flexible payment plans that give businesses room to breathe.

8) Confidence in Your Purchase Decision

You make your equipment financing decision with a clear idea about what your return on investment will be. No guesswork is required. You’ll also know how much you’ll spend to run and maintain each piece of equipment and, in turn, whether it makes financial sense for you to invest in that particular asset. A defined Return on Investment helps keep you confident that your purchase was a good one. And that keeps you from second-guessing yourself later on down the line. When you’re confident about your purchase, over time, it will pay off big time for your business and your bottom line!

9) Receive Credits on Next Year’s Taxes

When you finance equipment, you’re essentially receiving credits on next year’s taxes because your depreciation expense is lower. That also makes equipment a more tax-efficient financing vehicle than many other forms of capital. For example, if you purchase $100,000 worth of equipment with a 20% down payment and 5-year life, your annual depreciation expense is just $20,000 (versus $33,333 for cash purchases). This reduces your cash flow to cover operating expenses and results in net income that’s subject to lower tax rates-which means less money for Uncle Sam!

10) Lower Capital Expense

With cash-flow financing, you’ll lower your capital expense. In other words, you won’t need to use as much cash from your company accounts to purchase equipment. Instead, a lender will make short-term financing available for a fixed cost of interest and fees. Of course, there is still an upfront cost associated with such a loan and it will have to be paid before anything else but it doesn’t have to come directly out of your business account(s). By taking on a loan that can be paid off in installments over time instead of asking employees or shareholders for extra money, you’ll spend less each month and keep money in your business longer.

11)Flexibility 

Unlike typical loans, businesses don’t have long-term commitments when they sign up for leasing agreements or take out equipment loans.

Conclusion 

At every stage of your business, there’s a way to finance your equipment needs. Whether you're starting a business, growing an existing business, or financing an acquisition, you can find a financing option that will work for you. Take a look at these 10 benefits and then decide which one is right for you.

What is equipment financing? 

Equipment financing refers to your company using a loan to pay for most or all of its equipment purchases. When you have sufficient cash, your business can finance equipment in a couple of different ways: through an unsecured loan or credit line, or with a fixed asset (or capital) lease. In either case, you can avoid tying up too much cash and still get great depreciation benefits on your purchase.

What should I look for in a company that provides equipment financing?

If you’re looking for financing, there are a few things to keep in mind. While cost is important, it’s equally important to determine what type of financing you need. Here are a few questions to ask when trying to pick out which company provides equipment financing that best suits your needs.

How long does it take to receive approval from a company that provides equipment financing?

Unless you’re purchasing tens of thousands in equipment, you should be able to receive an approval within one business day from most companies that provide financing. When you apply for financing through a bank or credit union, they’ll take their time reviewing your application-but when you contract with an equipment finance company, they have to move fast because they get paid on an ongoing basis rather than just once at closing. 

What are my options for getting equipment financing?

While it’s tempting to finance your equipment in one fell swoop, you may find that equipment financing works best if you do it gradually. For example, instead of buying a piece of equipment for $1 million in cash upfront, take out a low-interest loan or lease and then finance it over several years.

How do I confirm what proportion i would like to borrow?

The key question is how much money you’ll need to run your business that is, how much inventory or equipment you’ll need, along with working capital and overhead. Once you know that number, it’s easy to figure out what kind of loan structure will work best for your business. Banks and other lenders all offer some form of equipment financing, so shop around and pick a lender who can help get you at least 80 percent of what you need.

Who is an ideal candidate for equipment financing? 

There are a variety of factors to consider when deciding whether equipment financing is right for you, your business, and your next investment. You should talk with a trusted equipment finance advisor who can help you evaluate your options and see if it makes sense for you.