It’s decision time: How should I purchase the equipment I need to run my business correctly—get a business loan or buy the equipment with a business line of credit? At some point, every business, large and small, has to acquire business equipment to operate—and few will have the adequate funding on hand to purchase that equipment outright.
Business Equipment Needs
What types of equipment will you need to run your business? Well, that depends on numerous factors and falls into various categories. Understandably, where you run your business and the type of business you run impact the kind of equipment you need and what your options are for business equipment financing. Some industries, such as construction, landscaping, agriculture, healthcare, energy, and transportation, require high-priced commercial equipment financing. On the lower end of the price spectrum, business equipment needs to target sole proprietors and smaller businesses, such as those providing translation, writing, accounting, and digital marketing services.
Most typical offices need basic equipment, such as computers, printers, and telecommunications devices. Many businesses have pricier equipment needs, which run the gamut from mailing and shipping equipment to customized manufacturing equipment. For high-tag items, you’ll need to look at various business equipment financing options such as equipment loans for small businesses, leasing options, and buying equipment with a business line of credit.
Equipment Loans for Small Business
Nearly 8 in 10 U.S. companies (79%) use some form of financing when acquiring equipment, including loans, leases, and lines of credit, according to the Equipment Leasing and Finance Association. Equipment loans are different from leasing or buying equipment with a business line of credit. Paying back equipment loans requires you to make regular fixed payments that include interest and principal over a fixed term set by the lender. Once the loan is paid in full, the equipment belongs to the business. Until the loan is paid off, the lender typically requires a lien on the equipment as collateral against the debt.
Carefully reviewing the loan terms before you sign any paperwork is crucial to the financial health of your business. In general, equipment loans cover 80-100% of the financing, and the average loan term is three to seven years. Failure to make a payment could result in expensive penalties and possibly repossession of the equipment. Equipment loans go on your personal and business credit reports and can negatively impact your credit scores.
Business equipment loans are available from traditional banks, although these banks have the most rigorous credit standards. If your business is newer, you might have a hard time proving you’re creditworthy and should be approved for an equipment loan. Also, equipment loans often require large down payments and can be a time-consuming process.
If you need the equipment in a hurry, consider buying equipment with a business line of credit or check with the company that sells the equipment for in-house financing options, such as leasing.
Leasing Business Equipment
Leasing equipment requires less cash upfront and could also cover equipment maintenance for little or no cost. Leasing contracts are typically administered through the equipment seller and can be offered in two different options.
You do not own the equipment. Payments are operational expenses. The length of the lease varies, and shorter leases usually have higher monthly payments. There are also typically high early-termination penalties to leave a lease early.
Capital leases are like loans. For accounting purposes, you own the equipment, and you claim depreciation and interest expenses.
Although every lease is structured differently, a lease’s lifetime cost is typically higher than you’d get with a business loan or buying the equipment with a business line of credit. Replacing the equipment when the lease is up could also be expensive, and the lease might have a slew of other requirements like mandatory lessor-imposed service contracts, taxes, and insurance costs.
Buying Equipment With a Business Line of Credit
Financing equipment with a business line of credit is a good option if you need the equipment quickly and with fewer credit requirements. A business line of credit is revolving credit, as opposed to installment credit. Loans are installment credit—you borrow a set amount and pay regular set installments on the entire loan amount, whether you buy something with the monies or not. With revolving credit, you are given an established credit limit, and you don’t make any payments until you draw from the funds, similar to a credit card. If you choose to buy equipment with a business line of credit, you readily have the cash on hand when the need for equipment arises.
Buying equipment with a business line of credit can also help when looking to buy equipment that can’t be financed, such as custom-made equipment and used equipment. As far as the seller is concerned, your business is paying for the equipment with cash. In addition, paying cash typically allows your business to negotiate for a better price for the equipment.
Like a credit card, as you pay back the business line of credit, the money is available to borrow again. The credit line is always there, and, unlike a loan or lease arrangement, you are not required to go through a reapplication process. For that reason, many business owners choose to obtain a business line of credit before a need occurs. The funds are an excellent source for business emergency funds when you need to buy materials, inventory, or make payroll.
Financing Solutions offers excellent unsecured options if you want to buy equipment with a business line of credit. Unsecured business lines of credit mean you don’t need collateral or personal guarantees to be approved. Also, a Financing Solutions application takes only a few minutes to fill out, and there are no setup costs. Once you’re approved, the money is wired to your account in mere minutes, and you can use the line of credit whenever you need it for whatever business needs you have. Getting a business line of credit is just a wise business decision. Contact us today to get your cash backup plan in place.