Upgrading equipment is often necessary for small businesses to stay competitive and operate efficiently. However, the costs involved can present a significant financial burden. Thankfully, equipment financing provides a solution that allows small businesses to spread out equipment costs over time.

This article will provide an overview of equipment financing and how it can benefit small businesses looking to acquire new assets.

What Is Equipment Financing?

Equipment financing refers to loans used specifically to pay for business equipment. Businesses can finance the purchase rather than paying the full equipment price upfront. The equipment itself serves as collateral for the loan. Payments over a set repayment term cover the principal loan amount plus interest.

In Australia, this type of financing is often included under the umbrella of commercial loans AU, which encompasses various business financing options.

Benefits Of Equipment Financing For Small Businesses

There are several advantages to financing over paying cash when acquiring new equipment:

• Preserve Capital – Financing conserves operating capital by avoiding large outlays of cash. This leaves more working capital available to meet regular expenses like payroll, rent, and supplies. With financing, 100% of available cash can go toward operating costs rather than be tied up in equipment. This improves liquidity and the ability to cover obligations.
• Manage Cash Flow – Equipment loans allow payments to be structured to match projected revenue streams. Monthly amounts can align with seasonal earning fluctuations or periods of higher income generation. This smoothing of payments helps avoid cash flow crunches from large lump-sum purchases. Outflows are predictable for better financial planning and management.
• Tax Advantages – The interest portion of financing payments is tax deductible as a business expense. This effectively reduces the after-tax cost of borrowing by offsetting taxable income. Cash purchases miss out on this tax benefit. The deduction also enhances the cash flow available for operations.
• Acquire Items Sooner – Waiting to accumulate enough capital for a cash purchase delays getting new equipment. Financing enables acquisitions now to realize operational benefits sooner. Quicker upgrades prevent inefficiencies and expenses from continuing with outdated assets. This supports competitiveness and taking advantage of emerging opportunities.
• Build Credit History – Making consistent and timely loan payments establishes a track record with lenders. This demonstrates the ability to handle credit responsibly. As positive repayment history grows, getting approved for additional financing in the future at better rates becomes easier. Strong business credit is invaluable for securing funding to operate and grow.

The flexibility of spreading costs over time, tax deductions, and operational improvements make equipment financing a strategic option compared to cash purchases. Proper planning and analysis of financing alternatives can lead to smart upgrades that enable small businesses to succeed.

Types Of Equipment Financing Options

Several forms of financing are available to fund equipment purchases. What works best depends on the specific business situation.

• Term Loans – These provide a lump sum payment that is then repaid over a three- to seven-year term through fixed monthly installments. The interest rate and payment amount stay consistent over the life of the loan. Term loans allow flexibility to purchase any type of equipment from any supplier. Approval depends on business financials and credit history.
• Equipment Leasing – Leasing means acquiring equipment usage rights for a set contractual period in exchange for monthly lease payments. At the end of the lease, options include purchasing the equipment at fair market value, returning it, or extending the lease. Leases may offer more flexible approval terms than loans based on business history and credit score. However, options are limited to equipment from the leasing company.
• Vendor Financing – Some equipment manufacturers and dealers directly provide financing for purchasing their products. This can take the form of installment loans or leases. Vendor financing typically has lower qualification requirements but restricts equipment to that vendor’s products. Research multiple vendors to find the best terms.
• SBA Loans – The Small Business Administration partners with lenders to guarantee portions of loans made to qualifying businesses, reducing the lender’s risk. This allows for more flexible approval requirements. SBA-backed loans can be used to purchase a wide range of equipment. However, the application process is extensive and has strict oversight.

Carefully weighing the costs, limitations, and approval criteria for different types of financing ensures acquiring the right equipment at favorable rates and terms for each small business situation. Consultation with financing advisors can guide navigating the range of options.

Important Considerations For Equipment Financing

While financing provides many advantages, business owners should carefully evaluate options to find the best approach.

• Calculate Total Repayment – Estimate the total repayment amount based on potential loan or lease terms to ensure it aligns with a budget. These factors in fees, interest, and length determine affordability. Aim to keep financing payments under 8–12% of gross revenue.
• Compare Lender Rates and Terms – Interest rates, fees, and repayment timelines vary widely between lenders and equipment financing products. Gathering multiple quotes makes it easy to compare and identify options that best match business needs and goals.
• Consider Lease-End Options – For leased equipment, factor in costs to purchase items at the end of the lease based on fair market value. Compare this to the cost of new replacement equipment. Understand the options for returning equipment or continuing leasing.
• Review Qualification Criteria – Lenders approve financing based on factors like annual revenue, time in business, credit score, collateral, and down payment percentage. Checking requirements beforehand avoids wasted time applying for products the business won’t realistically qualify for.
• Understand Tax Implications – Lease payments are fully tax-deductible as business expenses. For loans, only the interest portion is deductible. This affects the after-tax cost between financing options.
• Factor in Operating Costs – Account for ongoing expenses for maintenance, repairs, and eventual replacement to determine the equipment’s total cost of ownership over its useful lifespan. This allows proper budgeting for the full long-term impact.

Doing due diligence around these key considerations will lead to an informed financing decision optimized for each small business’ situation, budget, and operating needs.

The Bottom Line

Upgrading outdated equipment is often vital for small businesses to gain efficiencies and stay competitive. However, large equipment purchases can strain available capital. Equipment financing allows for acquiring needed equipment while spreading out costs over time. Reviewing financing options like loans, leases, and vendor financing can lead to the best approach. With proper planning and research, equipment financing provides an effective way for small businesses to invest in success.

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