What Are The Pros and Cons of Equipment Loans?

You probably use at least one form of equipment as a business owner, regardless of the industry of your company. This equipment is likely to be integral to how your organization operates, or makes it easier to do so.

Unfortunately, most machinery is costly, and it may be too expensive for you to buy with the multitude of other business expenses you have to afford. Fortunately, this is why business owners resort to loans for equipment for their funding needs!

Deciding whether a loan for equipment is right for your company would depend on many factors. However, equipment financing may be a good choice if you rely on expensive equipment to run your company.

We’ve compiled a list of the advantages and disadvantages of equipment loans to help you decide whether an equipment loan is right for your business.

Equipment Loan Disadvantages

Usage is limited to Equipment

Equipment loans may, as the name suggests, only be used for equipment. That means that the proceeds from an equipment loan would not be able to be used to fund payroll costs, rent, or anything else. For instance, in this case, if your business needs funding for construction equipment but also wants to use the funds for payroll, this is not the best form of loan for you.

Other forms of extra working capital allow you the ability to use the funding as you see fit, such as a merchant cash advance, lines of credit, or a credit card. This is not a very significant downside, of course, if the only thing you need the cash for is to buy equipment.

Higher rates than regular loans

Equipment loans usually offer attractive interest rates, as low as five percent. However by taking out a standard loan, if you have an excellent business credit history, you’ll usually be able to find a lower interest rate. Review your credit score before applying for any form of financing. That way, you can fix it prior to applying if you have bad credit.

Still, to have a loan amount (up to 30 to 90 days), some conventional lenders can be slower and may need more paperwork. In addition, many lenders have a business obligation period, meaning you will have to wait for a certain amount of time until you’ve been operational. Therefore, you may not be able to wait for a conventional lender to accept your request if your equipment needs are pressing.

You Own the Equipment

Depending on how you look at it, complete ownership of business equipment could be an advantage or a disadvantage. You’re borrowing money to buy and own equipment when you take out a small business loan for equipment. Equipment leasing is an alternative to this. You make monthly payments for an equipment lease to use the equipment, and then return it when the lease is over.

Owning rather than leasing may be costly for your organization for machines that could become outdated or depreciate relatively quickly. For long-term equipment, however, ownership is typically more affordable.

Equipment Loan Advantages

Receive money for buying, repairing, or leasing equipment

Even if your company is well-established, chances are that you don’t have enough money to spend on equipment. Fortunately, cash is just what these forms of loans offer for equipment.

Since business equipment loans allow you to specifically borrow money to pay for equipment, you don’t have to wait until you have the money on hand to make a big purchase or repair equipment that you already own.

Getting this money would boost the bottom line of your business; waiting to buy, lease or repair equipment may seriously hurt the annual revenue of your company especially if the equipment is crucial to your operations. For example, you’ll need to fix or replace it as soon as possible if your restaurant’s oven fails.

Spread The Purchase Cost

Cash flow is a constant issue for any business owner, and acquisitions of equipment only exacerbate cash flow problems further. However, since a loan for equipment allows you to spread the expenses, this form of loan helps address the issue of cash flow raised by acquisitions of equipment.

Let’s assume, for instance, you need to buy a large-format printer for several business locations, and the total cost would be $100,000. You could put down 10 percent with an equipment loan, and pay an average interest rate of six percent for five years. That means you’d pay $10,000 on day one and make only $1,700 in monthly payments over a five-year period. Without an equipment loan, you will immediately need $100,000 in cash to purchase the equipment directly.

No additional collateral needed

You may be forced to set up assets that you already own, such as real estate or cars, to apply for a term loan. This isn’t necessarily the case for a loan for equipment. Alternative and online lenders would typically be happy with using the equipment that you purchase as collateral for the loan. This can be very positive since the downside risk is greatly minimized by this.

Raising the potential revenues of your business

If you obtain a loan for equipment, it could increase the overall efficiency of your business. For example, getting additional machinery could help you complete orders quicker if you own manufacturing business. You might also be able to take on more clients, which will raise the bottom line.

You will be investing in your company by having an equipment loan and will even be able to gain more money in the long run!

Conclusion

Equipment loans are intended for a very particular reason, unlike many other forms of financing. Although that keeps these loans from being flexible, it also means that equipment loans can be extremely productive for the right individual. Take the time to perform an analysis, consider your needs, and decide the type of equipment your company requires to help yourself make the final decision. That way, to make the best decision for your business, you’ll have all the details you need.