The first question you should ask yourself before applying for equipment financing is whether or not you should even be purchasing the business equipment in the first place. For some businesses, leasing equipment might be the wiser, more cost-effective choice.
Among the reasons that small business owners should consider leasing, rather than buying, equipment are:
Better Cash Flow: By leasing, business owners typically do not have to put a lot of money down. This frees up cash for other uses, including payroll and other operating expenses.
Taking Advantage of the Latest Technology: Leasing means that you are not investing a lot of money in the purchase of equipment that could become obsolete. For instance, if a moving company leases a fleet of trucks rather than purchasing them, it can save on the cost of repairs on vehicles that will more frequently break down as they get older. Technology companies may want to take the same approach with IT systems that will become outdated much faster than a piece of machinery.
However, companies that decide to purchase equipment and own it outright eventually will stop having to make payments once the machinery is paid off in full. With leasing, obviously, a firm will be able to constantly upgrade the equipment but also will be continuously paying for it. Another advantage of ownership is being able to claim depreciation on your business tax returns.
Here are some tips for small business owners before they secure financing for equipment purchases:
Know exactly what equipment you will buy. Considerations include overall price, expected life of the equipment, and the rate of technological advancement in the industry. If one of your advantages is superior quality, then purchasing top-of-the-line equipment makes sense. If your company competes on cost, consider opting for used equipment that will be a lot less expensive.
Be prepared to justify the equipment purchase to potential lenders. Prepare a document – perhaps even a full business plan – that clearly outlines how the purchase will benefit your business. Include revenue projections that support your assertion that buying the equipment will increase revenues and/or cut operational costs.
Review your credit report/scores. Review your business credit report. If there are discrepancies, such as incorrect or outdated information, contact the credit agency and ask them to update your information. For instance, if you paid off tax liens against your business several years ago, you certainly don’t want such a blip showing up as a current obligation.
If your credit score is less than stellar – under 600, for example – you might consider holding off on applying for equipment financing if you do not need to make a large investment immediately. Work to improve your scores if you’re hoping to qualify for a traditional bank loan or SBA loan. You can also look for financing from an “alternative” lender. Non-bank lenders like these frequently help customers with less-than-perfect credit and can get you access to funds even faster than most banks because they don’t have to go through as much red tape.
Get your financial information in order before approaching a bank or other lender for funding. The most common reason that loan applications are rejected is because the potential borrower does not provide a complete loan package. Know your credit scores and ask your accountant to provide financial documents, including balance sheets and P&L statements. Be sure to provide as much documentation as possible that will instill confidence in the lender that you will be able to repay the cost of the equipment loan. After all, any lender’s primary concern when approving a business for a loan is: Will this company be able to pay back its debt?
So when making their fund vs. reject decision, what do banks really look for?
Generally, lenders consider the business owner’s personal credit score, length of time in business, repayment history, and company cash-flow. Although every institution has its own lending requirements, several documents are considered mandatory across lenders. In order to increase your odds of securing small business financing, include the following in your loan application package:
Loan Application Form: By now most lenders have invested in technology that allows online submission of small business loan applications. Forms and supporting documents can be uploaded into the lender’s system. Many alternative lenders don’t even offer paper forms any more. Regardless of how you submit it, you’ll always need to complete a loan application in some form, so make sure you’ve do that as you get started.
Personal Information: Lenders expect borrowers to provide basic background information about themselves, including current and previous addresses, aliases, criminal record (if any), tax liens, industry experience, educational level, and other information.
Business Plan: Having a well prepared business plan is an asset when applying for any type of small business financing. The plan should provide a detailed explanation of what the business is and where the owner hopes to take it. Elements include:
- Executive Summary: A one-page explanation of the business, its goals, operations, marketing efforts, and revenue model. This might just be the only page of the business plan that a loan officer will bother to read.
- Business Description: What does the company do? How will it make a profit?
- Competitive Landscape: Describe the local market where the business will be based and the target audience. Assess the competition objectively and then describe your differentiation.
- Product or Service: Explain how your product or service works and why it will attract customers.
- Sales, Marketing and Promotion: Describe your marketing plan. Include your web site, advertising plan and budget, public relations strategies for both traditional and social media, sales promotions, trade show attendance, couponing and sampling plans, etc.
- Management Team: List the key executives who will run the business and their experience in the industry or in a related field.
- Financial Data: Provide a break-even analysis, cash flow projection, balance sheets, and P&L statements.
- Owner Investment Information: Lenders want to know that borrowers “have skin in the game.” List how much money each owner has invested into the company.
- Appendices: Charts, graphs, logos, photos, and other images.
Business equipment financing provides business owners the ability to increase revenues and keep up with new technology or machinery. Just as with any other type of loan, interest rates for equipment purchases have been increasing slowly but steadily over the past year. Equipment loan interest rates can vary greatly, anywhere between 8 and 30 percent, and are likely to go up later in the year since the Federal Reserve has signaled that it may institute another rate hike before the end of 2018.
So if you’re in the market for new equipment for your business, now could be the perfect time to lock in a good offer. Speak to a lending specialist about your options, or work with your accountant to figure out how much you’ll need to finance when you do make the plunge to buy.