No matter what type of business you're running - product-based, service-based, SaaS - it's essential that you have the right equipment to keep your customers happy and to keep your company growing.
Purchasing the equipment you need, however, can be difficult; usually, a big hit on cash flow has to happen in order to acquire the kit you need.
That said, opting for an equipment finance package could be a great solution for your business.
Truth be told, Equipment Finance is a bit of an umbrella term and it can therefore become a bit misconstrued for startup owners and entrepreneurs.
In this piece, we look to make the topic of Equipment Finance simple, by clairfying:
- How equipment financing works
- How different methods of finance stack up against each other
- Pros & cons of each
A quick guide to equipment finance
As you've probably guessed, Equipment Finance is about purchasing specific equipment for your business (easy enough so far).
Your business then pays manageable monthly instalments on the equipment and, if agreed, once all the payments have been made, the equipment is your asset outright.
Most finance firms will require a personal guarantee, which essentially means the lender takes insurance for the payment against an asset you own personally, such as a car or house.
Financing vs. Leasing: What's the Difference?
Think of leasing like renting an office or retail space: all you’re doing is paying the rent of whatever equipment it is you’re using.
At the end of the lease, you can choose to renew the agreement and possibly get an upgrade, or buy the equipment outright and own it for future use.
Financing, however, is more like a mortgage: you're paying the money bank, but you effectively own the equipment or asset, so you're effectively just moving money from you left pocket into your right.
One of the advantages of leasing over financing is that there’s no requirement for you to put any sort of down payment on the equipment you wish to obtain, something you’re expected to do with a loan.
You may find it a bit easier to attain a lease over a finance agreement, too, especially if your credit rating isn't as stellar as you'd like.
You’re also a freer because you’re not bound by any collateral or a personal guarantee.
Leasing does have a slight drawback in that you do pay more for the equipment over time than if you bought it outright, but you don't feel the hit on the bottom line, which is arguably worth the greater overall cost.
Some of Your Options When it Comes to Equipment Finance:
When the time comes to look at finance, there are loads of options out there for you.
It's important to realise that as many businesses think finance is a one track deal.
However, deciding what the best fit for you depends on a few wee factors such as:
- Preferred repayment terms
- Desired loan amount
- Annual business revenues
- How long you’ve been in business
- Personal/business credit scores
Know your options… then take time to decide what is right for you
There’s an old testaments worth of material when it comes to considering which equipment finance path to choose.
The first thing to have a think about is the total cost of your borrowing, sure, a shiny low-interest rate may be appealing but it's important to look beyond that.
Check to see if you’re going to pay a loan origination fee or an annual maintenance fee as this would drive up your overall cost… which is why it's advisable to focus on APR which includes all of the fees that come with a loan.
Another factor to consider is the repayment terms, you have two options when it comes to this: if you opt for a shorter repayment term you’ll pay back the equipment loan quicker but the monthly payments will more than likely be higher.
Your second option is to go for a longer term payment which reduces the outgoings on your monthly cash flow but it could increase the interest total once your chosen equipment is all paid off.
Thanks for reading, we hope you found this guide on financing equipment helpful. If you’ve got any other questions or queries, give us a ring and we’ll be happy to help.