Cash flow is possibly the biggest and most common issue businesses face. Whether big or small, your company will likely feel the crunch at one time or another.
A simple way that many businesses free up cash is equipment finance. We’ll look at how it works and how to tell if it’s right for you.
What equipment financing is
Simply put, an equipment finance plan is loan designed to pay for a piece (or pieces) of equipment to be used by your business. The value of that piece of equipment generally determines the dollar amount the lender will give you. You will pay it back over an agreed-upon term with an agreed-upon interest rate, after which point you will own the equipment.
Lenders generally require a down payment of some sort (often a percentage of the retail price of the equipment) and will only offer the loan if your credit rating is satisfactory or better. In some cases, the financer will only approve certain types or brands of equipment that they know are reliable and good investments.
Pros and cons
The biggest advantage of equipment financing is that it mitigates or eliminates cash flow concerns. If you don’t have to pay out the full price of a necessary piece of business equipment, that cash is now freed up for other uses. Also, if the equipment will last beyond the life of the loan, you’ll not only get the cash you had been paying monthly back into your pocket, but it may become a long-term asset that will help your company’s bottom line and can be useful for future borrowing.
The major disadvantage is that the loan is often structured with higher monthly payments in the first year or years of the loan. This can hurt cash flow as much as a loan might help it, and in some cases, make it more difficult to even qualify for the loan.
When considering an equipment finance program, it is critical to evaluate if the piece of equipment you’re looking to purchase is appropriate to finance. There are many pieces of technology that become obsolete in a few short years (or less). It would be a poor business decision to enter a multi-year finance plan that would require you to continue to make payments on a piece of equipment that is obsolete, out-of-date, or even useless.