The use of equipment financing is good decision making, especially when compared to bank loans or cash purchases. Investing cash in equipment makes the business asset rich and cash poor. When a business is cash poor, it is limited in its ability to take advantage of new opportunities or to respond to changing market conditions.
Today, more than 80% of all U.S. corporations finance some or all of their equipment. It is the use of equipment, not ownership that generates profits. This understanding explains the rise of equipment financing activity, especially as requirements increase in this high-productivity age. Whether opening a new business or expanding existing facilities, the method you choose to acquire equipment can have a significant impact on your business, credit and cash flow.
These are not really “secrets” but valuable information to know and apply.
Secret #1: Virtually all types of equipment in almost any industry can be financed. You can choose the manufacturer, model, accessories and the seller. You’re covered by all standard manufacturers’ warranties. With equipment finance, you get 100% financing so the cash needed up-front is reduced. Most soft costs can be included: delivery charges, installation, training, and software to ensure that the equipment is productive immediately, speeding your return on investment.
Secret #2: Bank loans can be more expensive because of the large security deposit required. Down payments for bank loans will usually range between 20% and 40%. The result is that there is a tremendous difference between the effective APR and the stated APR. A stated 8% bank rate with a 25% down payment is actually equal to a 21% APR on a five-year loan. When comparing offers, try to match apples to apples.
Secret #3: Even if you have cash to purchase your equipment, using it is rarely the best choice. With equipment financing, cash can be used for other requirements such as expanding sales, starting new marketing programs, offering quantity discounts, replenishing inventories, or opening a new line of products. Using cash for necessary business expenses that cannot be financed is much better decision-making than spending it on equipment that is worth less and less as time goes by.
Secret #4: With the lower, fixed-rate payments of an equipment finance agreement, you’re protected against inflation. Cash outlays are deferred, as compared to an up-front purchase. In the future, “cheaper” dollars will be making your finance payments as inflation lessens your cost. This actually reduces the cost of financing to you in real dollars, a significant advantage that is often overlooked.
Secret #5: Financing equipment offers a wide range of benefits, from consistency with expenses to increased cash flow. But the most significant advantage of financing is the ability to maintain up-to-date equipment. Financing allows you to easily and affordably add equipment or upgrade to a completely new piece of machinery to meet future needs. This lets you transfer the risk of being caught with obsolete equipment to the financing company. With the scheduled updating of your business equipment offered through equipment financing, you can maintain a competitive edge, keeping you ahead of your competition. In contrast, when equipment is purchased with cash or bank financing, there is an incentive to postpone any upgrade until the original investment has been recouped through depreciation, which hinders your flexibility. A planned replacement program avoids obsolescence.
In summary, there are many “Secrets of Equipment Financing” that require some research to uncover. These can be determining factors in the survival and profitability of any business enterprise. As such, they warrant in-depth consideration to determine their potential contributions to every individual equipment acquisition situation. Nearly 100% of the time, bank loans and cash purchases are always significantly less beneficial and less advantageous than equipment financing.