Equipment Financing: How It Works and How to Leverage It for Your Small Business
- Posted by Sunil Bhirani
- On January 17, 2021
If you want to start a business but don’t know how to finance your machinery and other forms of equipment, what would you do?
The solution for these types of situations is to use equipment financing. This refers to the process of taking out a loan to purchase the necessary equipment for your business. For instance, if you are starting a restaurant, you will need resources such as ovens and freezers.
Not sure how to leverage equipment financing for your business? This article will tell you all you need to know about equipment financing.
How Equipment Financing Works
Equipment finance or equipment loan is usually offered to small businesses to purchase the necessary materials or appliances to kickstart operations. You will then have to repay this loan over a certain repayment period, which usually lasts for a few years.
Most of the time, the equipment you purchase from the loan will act as collateral when you fail to repay your debts. This means that lenders can seize the purchased materials as a form of compensation. In some cases, such as with Inspyre Funding, you can use this loan to finance 100% of the required assets.
Benefits of Equipment Loans
Equipment financing carries a lot of benefits, especially for small business owners who don’t have access to the same level of finances as well-established corporations. These are a few advantages of accessing an equipment loan.
It Increases Your Level of Capital
By accessing loans, you can purchase more equipment than if you rely on other methods of financing that may not cover up to 100% of your costs. By having a greater range of equipment, your business can expand more quickly and will not be hindered by difficulties in keeping up with the demand.
This will also mean that you can free up your finances to spend on other aspects of the company.
You Can Access Tax Benefits
When you purchase equipment through an equipment loan, the interest you end up paying is usually tax-deductible. Section 179 of the IRS tax code declares that you can write off the entire amount you spend on equipment purchases.
This means that, even if you’re not repaying the entire equipment loan during a specific year, you can still deduct the total sum on your taxes.
The Application Process Is Usually Simple
The process of applying for equipment finance is relatively quick and easy compared with other forms of financing. This especially works if your business has a good credit score.
With Inspyre Funding, for instance, the eligibility criteria only require at least 6 months in business, at least $10,000 in monthly business revenues, and that the business is situated in the United States.
Disadvantages of Equipment Loans
While equipment financing is promising for a lot of small business owners, keep in mind that there are still limitations. These are a few disadvantages that come with using equipment loans.
It Only Covers the Cost of Equipment
This sounds obvious enough, but this restricts your ability to grow and fully make use of the loan. No matter how good your equipment range is, for instance, it won’t matter if you don’t get to hire enough talented employees to make use of them.
While an equipment loan will still be beneficial, it doesn’t always guarantee successful operations.
You Own Everything You Buy
This may be a pro or a con, depending on where you stand, but it does limit your flexibility. In contrast to an equipment lease, equipment loans mean you are stuck with whatever materials you purchase.
If you bought high-quality materials that are difficult to maintain throughout your operating period, you may struggle with the maintenance once your loan runs out.
You May Face Relatively High-Interest Rates
While equipment financing covers all the costs of your equipment so you don’t have to worry about them in the short-term, the loans usually carry higher interest rates than other forms of financing. This is especially true if you have a low credit score.
How to Leverage Equipment Financing
Have you decided to stick with equipment financing? Not all businesses can maximize their usage of equipment loans because they’re not choosing the type of loan that best fits their situation. These are a few key points you can consider to make sure that you do.
1. Know What You Need
Do you really need that much equipment? If purchasing raw materials for production doesn’t actually require too much capital, you will lose out if you apply for an equipment loan. Instead, you can choose a more general form of financing.
2. Assess What You Qualify For
Your qualifications will determine the quality of the equipment financing loans you receive, as well as the level of interest rates. To know your worth, you need to know:
- Your credit score
- Your monthly revenues
- Your business history (are there any glaring issues that can become an issue for your lender?)
3. Do Your Research
Don’t shy away from keeping your options open. Make sure to spend the time comparing different equipment finance loans, and see which one offers you the best deals.
Using Equipment Financing for Your Small Business
If you are a small business looking to grow, you know that having more equipment is essential. Equipment financing can help you on the way to success if you know what to look for and how to leverage the loan to your benefit.
Contact us today to access our equipment finance loan programs.