Pros and Cons of Equipment Financing
When you need to make a purchase of equipment for your business, equipment financing is a useful funding option. Equipment financing are business loans that help small business owners pay for equipment over time. Equipment financing requires you to pledge your purchased equipment as collateral, therefore making the loan term length dependent on equipment’s useful life.
By utilizing equipment financing, you have the funding necessary to buy, replace, or upgrade equipment. For example, if you are a restaurateur, you may consider using equipment financing to buy more machinery or ovens to complete orders faster and take on more customers.
Equipment financing also allows your business to spread the cost of your equipment purchase. With predictable monthly payments, you will be able to maintain a steady cash flow. Paying for the entire cost of the equipment upfront can drain your cash on hand.
Finally, equipment financing can help build your business credit history, which can help you qualify for other types of financing in the future.
Easy to Qualify
Equipment financing can be quicker and easier to qualify for than traditional financing since you are putting up the purchased equipment as collateral. This allows lenders to quickly recoup their losses in the event of default by seizing the equipment that is being financed and liquidating it. For this reason, lenders are more open to considering business owners with less-than-stellar credit scores for equipment financing.
When evaluating loan candidates, lenders are primarily concerned with the condition and resale value of the equipment being financed. The higher the resale value and the better the condition of the equipment being financed, the lower the interest rate. The equipment’s resale value can also determine how much money a lender is willing to lend to you: the higher the resale value, the more money they will be willing to loan you.
No Additional Collateral
Since the purchased equipment itself acts as collateral, lenders will most likely not ask you to put up any additional collateral.
Potentially High Down Payment
One of the disadvantages of equipment financing is that most lenders will require an initial down payment. For example, a lender may provide you 80% of the equipment cost, which means you are responsible for paying the remainder upfront. This can be difficult to do so depending on your cash flow situation.
One of the reasons that business owners choose to use equipment financing instead of equipment leasing is to gain full ownership of the purchased equipment. However, with ownership, you also assume the risk of owning obsolete equipment by the end of the loan’s term.
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