equipment financing

To Rent, To Lease or To Buy: Obtaining Expensive Equipment for Your Business

by Brandon Wyson6 minutes / May 20, 2022

Any small business owner stuck between buying or renting essential equipment knows that the query is not a simple binary. Making a choice you are firmly satisfied with requires both a full understanding of your current financial standings as well as a clear picture of where you anticipate your business to stand in the future. And making the wrong decision can have lasting consequences of their own. Let’s discuss practical use cases to determine where buying, renting, or leasing may be right for your business.

When to Buy…

Potential Benefits to Buying Equipment

Buying property or equipment – whether through cash on-hand or equipment financing – has the obvious incentive of true ownership. Having absolute ownership over your property or expensive equipment has the chance to be a cost-saver in the case of equipment you use frequently or in property that appreciates in value. Consider this example: a farmer with 75 acres of tillable land outright purchases a combine harvester. Since the combine harvester is necessary to reap crops annually, the purchase may very well be a financial gain after several years. Consider as well the IRS Section 179 allowance; businesses were allowed to deduct up to $1,080,000 as a first year write off in equivalence to equipment or software purchased during that tax year in 2022.

Potential Detriments When Buying Equipment

This example, however, plays equally well into the downsides of purchasing: combine harvesters are exceedingly expensive outright (like many industry-specific machines) and can be equally expensive to repair if you don’t already employ sufficient technicians. Imagine, as well, the potential that a certain crop doesn’t properly germinate or labor shortages lead your team to miss proper times for reaping; in the case of leasing or renting, the tangible financial hit of that reduced harvest would likely not be as dire.

Buying is a Bet for the Best

Buying expensive equipment outright requires sage-like industry knowledge as well as an exit strategy in order to be fully insulated, or as much so as is possible. Business owners on their first venture or entering a new industry may find that buying equipment more than double-digit percentages of their total capital is markedly unwise. Small businesses have the most to gain from owning their equipment… but only if that equipment meaningfully returns on its investment. Purchased equipment that fails to see regular use or drastically impacts your capital or overhead has the risk of becoming a monument to rash decisions rather than a useful business tool.

When to Rent…

Potential Benefits to Renting Equipment

Not every industry allows for easy renting of equipment. Renting generally is most beneficial to industries that are wholly seasonal or have tracked busy seasons. If you run a year-round business with consistent revenue, customers, and products, it is unlikely the monthly price and lack of ownership could in any way benefit your business.

Since renting requires the least capital upfront, it is often the most attractive option for freshly minted businesses that are still finding their stride. A worst-case scenario for a small business is preemptively paying for assets that don’t turn around to help your business. Let us consider the example of a farmer and a combine harvester again: in 2022, new or even lightly used combine harvesters can cost stupefying amounts of money upfront, often close to $750,000. In our example of a 75-acre farm, that cost is likely too much capital for a farm of this size which is not the subsidiary of a larger corporate structure. Renting a combine may simply be the only way for smaller farms (or small seasonal businesses) to turn a profit annually. The hope for farms and small businesses with similar structures, of course, is to save enough capital or meaningfully study trends enough to which purchasing expensive equipment amounts to a no-brainer good decision.

Potential Detriments When Renting Equipment

Rented equipment isn’t yours. Flatly, this almost explains any major downside that comes with renting. In the case of damage to any machinery you rent, there is a very good chance you will also have to pay for repairs on top of your existing rate for the rental. And let’s go back to our farmer one more time: Our farmer simply does not have the capital to outright buy a combine harvester (as is the case for many harvest-based farmers) and annually rents a combine from a regional host. Here’s the trouble: seasonal harvests happen all at once for farmers in the same region. This means that every farmer in that region that doesn’t own their own combine is going to rush to rent. In that rush, there is a more than possible chance that certain farmers may not secure a combine and then suffer the loss of an entire harvest. Leaving essential equipment in the hands of a third party introduces unpredictable variables for business owners. And for small business owners with smaller safety nets, suddenly being left without a suitable rental can spell disaster.

Rent From Trusted Sources and Only When You Have To

Unpredictability can quickly shutter seasonal businesses for good; of course, seasonal businesses are also those who are most likely to rent expensive machinery. Renting isn’t bad by nature; many industries like construction and, of course, agriculture wholly depend on rentals in order to remain profitable. This simply means that every choice to rent or buy ought to be informed by genuine industry trend data. Whether this means understanding the potential loss from not renting a certain piece of equipment or funding a safety net in the event of a missed rental or other unexpected hits.

Third Choice… Leasing

For those industries where rentals are rare or simply implausible, leasing can likely be a worthy third choice to consider when dealing with any major, expensive machinery. Leasing is a great option for businesses that use equipment that is constantly changing. With a lease, you’re only committed to equipment for the length of the lease, so you’re not stuck with equipment that can quickly become obsolete. While vehicles, specifically, are most peoples’ first thought for lease potential (our farmer and combine are back!), it’s worth knowing that several major industries lease a wide variety of machines. Offices can lease expensive copy machines, charter schools can lease student laptops, and several more practical examples are out there and likely relevant to just about every industry.

Leave No Stone Unturned and No Path Untested

No small business owner can be fully certain that buying, renting, or leasing expensive equipment is the right choice. What small business owners can do, however, is consider, as we have here, the potential benefits and detriments to each choice parallel to their own business. Those businesses who make informed decisions with safety nets and back up plans have the least to lose when making a major financial decision.

Brandon Wyson

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What Is Heavy Equipment Financing?

Construction, Industry Challenges

by Simon Dreyfuss7 minutes / January 9, 2022

KEY TAKEAWAYS

Whether you’re in construction, agriculture, or another industry that requires large equipment to operate, heavy equipment financing can provide a valuable tool to procure essential machinery without depleting your working capital.
Heavy equipment financing, like all financing, has both pros and cons. While it can offer tax benefits and flexible payment terms, it’s crucial to consider potential downsides such as lengthy repayment schedules which can impact future borrowing.
Applying for heavy equipment financing is streamlined and straightforward process which typically requires minimal documentation.

Technology is ever-changing and the equipment you’re using can quickly become obsolete. When this happens, your business may have to invest in new heavy equipment to keep itself going and remain competitive. However, large equipment purchases can put a dent in your cash flow, which could impact your operations.

Heavy equipment financing gives you the resources you need to purchase or lease much-needed heavy equipment without dipping into your cash reserves. But what exactly is heavy equipment financing? In this article, we’ll discuss its definition, the pros and cons of utilizing it, and the requirements for approval.

What Is Heavy Equipment Financing?

Heavy equipment financing is a business loan designed specifically for purchasing heavy-duty mowers, backhoes, bulldozers, and other heavy equipment. The loan is prevalent in manufacturing, agriculture, transportation, and even the food industry.

Lenders give you the working capital needed to secure the necessary equipment. You can get up to 100% financing to cover the cost of the equipment depending on several factors, like your credit rating, type of equipment, and the industry you’re in.

Pros of Heavy Equipment Financing

Securing financing for your new heavy equipment provides you with several benefits you won’t enjoy from other options.
One is that a business owner has the potential to claim a full deduction on the amount of the purchase from yearly income tax. Under Section 179 of the Internal Revenue Code, businesses that purchase new machinery this year may be able to claim tax deductions of up to $1.05 million. One of the key requirements, however, is that the equipment must be used in business operations in the tax year for which you’re claiming deductions in order to take advantage of this deduction.

Leasing offers a similar benefit, but you can only deduct the amount you’re paying every month from the lease. The deduction would be equal to the monthly amortization multiplied by 12 months. Leasing does guarantee yearly tax savings throughout the contract, but heavy equipment financing offers a higher lump-sum compensation immediately after purchasing the gear, aside from the annual deductions from the fees and interest incurred.

Another benefit of heavy equipment financing is flexibility. Armed with your financial statements, you have the opportunity to negotiate more comfortable terms. This means you can avoid breaking the bank and maintain good financial standing. You can also exert a degree of control over your cash flow and expenditures.

In all cases, financing is a method that helps businesses like yours build good credit records. You just need to make sure your lender reports your standing to business credit bureaus. It could be a pathway through which you get access to more business credit.

Cons of Heavy Equipment Financing

Like all available options for acquiring heavy equipment, financing also has its own set of disadvantages.
One disadvantage is that the significant amount of the loan and the extended terms can tie your finances down until it matures. It might be difficult for you to secure another loan when you need it, as some lenders are wary about granting loans when borrowers appear to be deep in debt already. This is beyond your control since lenders base decisions on your financial statements.

In addition, the ongoing loan could affect your financial health. Loan payments are accounted for as liabilities, so there’s a risk of your debt-to-asset ratio getting higher. In the eyes of creditors, a high ratio means that a borrower carries a high risk of not paying back a loan. As stated above, they may decline your application or, at the very least, attach high-interest rates to the money they will lend.

While this doesn’t happen often, another drawback is that the lender might require you to secure the loan using existing assets. Some creditors do not require any collateral, preferring instead to secure the loan with the equipment being purchased.

Unless expressly stated during the application process and in your contract, you can rest assured that your business and personal assets are safe even if you default on your obligation in heavy equipment financing.
Last but not least, an overly long repayment period could result in depreciation. In other words, your heavy equipment might become obsolete after it is fully paid off. Of course, this can be avoided by negotiating shorter yet still affordable repayment terms.

How to Apply for a Heavy Equipment Financing

The application process for heavy equipment financing is fast and straightforward. Many lenders, like Kapitus, offer an easy-to-use equipment financing application that should only take about five minutes to complete and requires minimal documentation.

One of the documents required is the vendor invoice. The invoice proves the value of the heavy equipment you’re looking to borrow money for. The lender needs this to know how much you need from them. Your vendor will send this invoice to you as part of your purchase agreement. You don’t have to pay for the invoice right away, which gives you more time to seek financing.

You also need to prepare your financial statements, which include documentation from your bank. It’s highly recommended to have at least six months’ worth of statements on hand when you are applying.
Once you’ve gathered all your documents, you just need to go to the issuer’s website and complete an application. The application covers information about your business, the type of equipment you’re looking to purchase, and some personal information.

Complete the application, attach the needed documents, and you’ve applied!. Make sure to free up some time because a consultant will call you to learn more about your business. After receiving confirmation of approval, you’ll also receive another call to discuss your payment terms just before the lender pays for the vendor invoice.
The payment and final delivery of the equipment then conclude the process. As mentioned earlier, all that’s left to do is to keep your end of the bargain by making payments as agreed upon.

Maximizing the Benefits of Heavy Equipment Financing

As a bonus, here are some tips that could help you maximize the benefits of a heavy equipment loan.
Many businesses choose to purchase new equipment as it’s less likely to break down from frequent use and is covered by warranty for the first few years. In other words, you can avoid expensive maintenance or repair fees that could affect your cash flow.

If you find yourself preferring used equipment, you should enlist a professional mechanic to inspect the equipment before you request an invoice. If there are defects, secure the seller’s commitment to fixing them before moving forward with a purchase. Again, the goal is to avoid spending money on repair and maintenance as much as possible.
Lastly, don’t be afraid to negotiate. There’s a reason why there are a couple of calls before you’re approved for your heavy equipment loan. This gives you time to understand your contract’s terms and allows you to discuss and negotiate those terms.

Your equipment is an integral and essential part of your business. You should not hesitate to invest in new equipment if the old ones in your inventory are way past their useful lives. Many creditors are ready to help you with this significant investment through heavy equipment financing.

Simon Dreyfuss

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6 Business Alternatives for Bank Loans and When They Make Sense

Financing, Manage Your Money

by [email protected]6 minutes / July 22, 2019

Need financing for your business but can’t qualify at a bank? There are various financing alternatives to keep your operations running.

Borrowing money is an essential part of building a small business. But when you need a loan, traditional lenders like the bank might not be an option. They tend to have strict small business lending standards. For example, you need established business credit, collateral and detailed financial statements for bank loan approval. This is a difficult hurdle for companies that have only been around for a couple years. Fortunately, as a business owner, you have other options, with a number of business alternatives for bank loans on the market today.

These alternative options can be your financing lifeline until you build enough of a financial track record to qualify for more traditional financial products.

LET’S TAKE A LOOK AT THESE BUSINESS ALTERNATIVES FOR BANK LOANS AND WHEN THEY MAKE THE MOST SENSE.

1 – Online Loans

Banks aren’t the only ones lending money. Alternative and online lenders are also a quality source of small business financing. They offer stand-alone cash flow loans that you can invest into your business and spend however you choose. If you want more flexibility, you could also open a line of credit. A line of credit lets you borrow, pay the money back and re-borrow again as many times as you want.

It’s easier to qualify for loans from alternative lenders because their requirements are not as strict as with banks. Another advantage is you often don’t have to secure the loan with your future business revenue or other collateral. However, your business will need to meet some standards like stable revenue and a good business plan for how you will use the loan proceeds.

Best fit for: A business with stable revenue looking to borrow cash quickly, without putting up collateral.

2 – SBA Loans

Another way to borrow is through the Small Business Association. This government organization assists small business owners and one of their services is to help them qualify for loans. The SBA doesn’t actually lend money. Instead they agree to back a certain percentage of the loan, guaranteeing repayment to the lender. This makes the lenders more likely to accept your application.

SBA loans can be a great tool provided you can qualify. The process does take time and you’ll need to submit, at minimum, similar documents that you would include as part of a bank loan application – such as a business plan, bank statements and your credit report.

Understanding the SBA system can improve your chances of qualifying so be sure to work with a lender that regularly works with these types of loans.

Best fit for: A business that can meet the SBA standards for a loan and also knows a lender that understands the application process.

3 – Equipment Financing

If your small business needs money specifically to buy a new piece of equipment or machinery, then equipment financing could be the answer. These small business loans can only be used to buy an asset, which also counts as the loan’s collateral. This makes it easier to qualify because if you end up not paying off the debt, the lender can take back the equipment as repayment.

With this type of financing, you can often buy new equipment with no money down but you’ll still receive the full tax break for the business investment, as if you bought the equipment with cash. You can also set up the financing as a lease which would let you replace the equipment earlier with new versions as they come out.

Best fit for: Buying or leasing new equipment for your business.

4 – Purchase Order Financing

A lack of cash can put even thriving businesses in trouble. 52% of small business owners had to forgo a project or sales worth $10,000 because of insufficient cash, according to an Intuit Quickbooks survey (slide 2). If you’ve got a project lined up but need some extra money to make it happen, purchase order financing could be the answer.

These short-term loans cover up to 100% of your supplier costs if you can show that you’ve got an order that will turn things around. Once you make the sale, the lender will deduct their fees from the proceeds. That way you still fulfill your order without taking on any extra debt. And since you can prove that you’ll be able to pay the money back quickly this financing is easier to qualify for. You just need to prove the upcoming purchase order.

Best fit for: When you’ve almost completed a sale and need a quick cash infusion to reach the finish line.

5 – Invoice Factoring

After you make a sale, your job still isn’t done because you you’ll need to collect payment. This can take between 30 to 90 days, depending on your payment terms. And, as many know, it could take even longer when customers miss payment deadlines. Not to mention there’s always the risk they don’t pay.

If your invoices are piling up and you need cash, invoice factoring could be the solution. You transfer over an unpaid invoice to a financing company, called the factor, and they’ll give you an advance on the payment.

From there, the factor takes over collecting from your clients. Once they get paid, they’ll give you the rest of the invoice amount minus their fee, which could be as little as 1.5% of the invoice amount.

Best fit for: A business with unpaid client invoices that wants to improve cash flow.

6 – Revenue Based Financing

Revenue based financing is the last of our business alternatives for bank loans. These loans have a simplified and fast application process, a great solution if your business needs money now. Lenders can approve this financing quickly because they just look at your historic revenue and how long you’ve been in business. They use this to forecast your future cash flow.

Based on that, they’ll give you a lump sum of cash. The lender will then collect a set percentage of your future sales on a daily or weekly basis.

Best fit for: A business with a proven history of revenue that needs money but does not want to go through a lengthy loan application process.

Don’t let a bank loan rejection discourage you from raising the money your business needs. As you can see, there are plenty of alternatives. If you have any questions to figure out which of these solutions is the right fit, reach out to a loan specialist today.

[email protected]

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Is Equipment Financing an Option For You?

Financing, Manage Your Money

by [email protected]4 minutes / February 16, 2018

Is Equipment Financing an Option for You.

Every small business owner will agree that running a business is very exciting and challenging. From managing an office filled with computers and printers, break rooms and vending machines to purchasing on-the-ground supplies for transportation services or construction businesses, every piece of equipment matters. That is why equipment financing can be exceptionally beneficial in easing some of the burden associated with these tasks.

To keep your business operating seamlessly, everything must be planned. However new opportunities seldom present themselves with a clean plan. Business owners may often find themselves in need of purchasing new equipment to make the most of a new lucrative opportunity.

Equipment financing eases these worries and bolsters your growth by catering to the needs of your business without any down-payment. Equipment financing is ideal for small businesses who have vehicle fleets, towing companies, construction contractors, medical practices, and those that have a large warehouse.

5 THINGS YOU SHOULD KNOW ABOUT EQUIPMENT FINANCING

1. It’s a great way to get a leg up on your competition

With equipment financing, you can have the most advanced equipment in your sector without adversely impacting the financial health of your small business.

2. Do your homework

Ensuring the right quality of equipment financing is a top priority for any small business owner. Carefully consider some basic parameters before entering into an agreement for equipment financing, including the amount of cash required, fees and alternate equipment upgrade options.

3. Questions to consider before pursuing new equipment

How will the new equipment add revenue or reduce costs for your business? How essential is it to supplement the growth of your business, cash flow, and profits? Then choose a lender whose terms suit your requirements.

4. Balance your cost and cash flow

While the approval process for equipment financing is fast and hassle-free, things can get quite tricky if you don’t balance your cost and cash flow. For example, the cash flow is impacted if you repay over a short term. If you select a long-term repayment, then you end up paying a lot of money on the lure of low payments. Therefore, choose a repayment term that is in sync with your cash flow and what you can do easily on a monthly basis.

5. Be aware of associated costs

These costs can include insurance and maintenance. Many businesses forget to factor in these costs when looking for equipment financing. Don’t let yourself be one of them!

Should I Use Equipment Financing for My Next Purchase?