How a Business Credit Line Can Supercharge Equipment Purchases

What Is a Business Credit Line?

A business line of credit is a type of revolving financing extended to business owners. A line of credit works more like a credit card, and less like a traditional loan. Instead of receiving a lump sum, borrowers have access to a credit limit that they can draw from.

You only pay interest on the credit you use, not the entire credit limit. So, if you're approved for a $70,000 business line of credit, but only use $30,000, you pay interest only on the $30,000.

What makes business credit lines attractive is that they're not a one-and-done situation. You can continue to tap the credit line as needed. Like a credit card, your credit limit resets as you pay back what you've borrowed.

How Business Credit Lines Help with Equipment Purchases

Many small businesses require certain equipment purchases. Whether you're in construction, hospitality, manufacturing, transportation, landscaping, or something else, having the right tools is essential.

The price tag on just one piece of equipment could easily be thousands of dollars. Some, even in the six-figure range.  That means if you need to upgrade your equipment or buy equipment to launch a business, your costs are going to be high. Business credit lines are a funding option that can help. Here's how a line of credit can help you purchase equipment and grow your business.

Flexible Financing 

Business credit lines offer flexible financing. They're open-ended and give borrowers continual access to funds. So, you might decide to make initial equipment purchases to get up and running. Down the line, you might realize you want to upgrade more equipment and make additional purchases. A business line of credit allows you to have continual access to funds. When you repay, more of your credit limit becomes available.

Preserves Cash Flow

Using business credit lines to purchase equipment can help you preserve your cash flow. As a small business owner, maintaining access to working capital is key.

Paying huge upfront costs for equipment can put you in a financial squeeze. Using a business line of credit, you can give your budget some breathing room. Instead of draining some of your capital, you can break down costs into manageable payments.

Accessibility

If you're considering different financing options, business credit lines can offer faster and more accessible capital than traditional loans. For example, getting an equipment loan or a small business loan from the Small Business Administration (SBA loans) may have longer timelines than getting a business line of credit.

When you're in need of capital to make essential equipment purchases, timing matters. You may not have days, weeks, or months to wait. A business line of credit may be able to provide financing with more favorable timelines.

Convenience

Since business credit lines are revolving, they offer borrowers a great deal of convenience. If you don't need to make any equipment purchases, you can have the option to use the line of credit on standby.

When you need to make equipment purchases, you have access to financing. This type of convenience and flexibility is great for businesses that might experience seasonal slowdowns. For example, if you're in construction or hospitality, you might have a peak season and then a slower period where the revenue slows down, too.

Using a business line of credit is a way to purchase equipment when you need it, no matter what season you're in.

Depending on the lender, you may be eligible to pay only a small percentage of your balance as your minimum payment. You may also have a draw period where you can access the funds, then a repayment period to pay off the balance.

Pays for the Extras

If you use an equipment loan or lease, what you borrow will only cover the actual equipment. Alternatively, a business line of credit can help you pay for all the extras. Whether that's installing the equipment, paying delivery fees, or maintenance, a business line of credit has you covered.

Business Credit Lines vs. Equipment Financing

Business credit lines and equipment financing are two common financing solutions to help you purchase equipment. A business line of credit provides ongoing access to funds. So, you can make a purchase, repay, and make another purchase, as needed.

Equipment financing refers to either an equipment loan or a lease. These options can help you purchase a piece of equipment outright or rent equipment for a specific lease term.

An equipment loan or lease may be a better option for large purchases that require longer repayment terms. A business line of credit may be better suited for smaller purchases or short-term needs. Here, we cover some pros and cons of business credit lines vs. equipment financing.

Business Credit Lines Pros:

• Provides flexibility

• Improves cash flow

• May have faster approval

Business Credit Lines Cons:

• May have higher interest rates

• Potentially lower credit limits

Equipment Financing Pros:

• Equipment acts as collateral

• May have lower interest rates

• Some have longer repayment terms

Equipment Financing Cons:

• Limited flexibility

• May have longer approval timelines

• Only covers equipment costs

Either option can be a good fit, depending on your specific needs. Weigh the pros and cons and understand how each will impact your repayment. Business lines of credit are more multi-purpose financing solutions.

They cover not only your equipment purchases, but also anything else that pops up or any other incidental costs. If you choose to apply for a business line of credit, there are some things to look for when comparing lenders and options.

What to Look: Small Business Line of Credit

Business credit lines can supercharge your equipment purchases. They can give you flexible access to funds and provide a number of benefits. Even so, it's crucial to do your own research and be a responsible borrower. Here are some things to consider with a business line of credit.

• Eligibility requirements: Every lender has different underwriting criteria. However, many of them look at similar things like your credit history, monthly revenue and annual revenue, and time in business. Review your credit report for potential errors.

• Annual Percentage Rate (APR): When you take out any kind of financing, review the interest rates or APR. Higher interest rates make borrowing more expensive, whereas lower interest rates make it more affordable. Though business credit lines offer flexibility, they may have higher rates than term loans or other financing options. Plus, rates are often variable, which means they can fluctuate based on economic conditions.

• Credit limit: You want to ensure that your credit limit is enough to purchase your new or used equipment. Credit limits can vary by lender. So, you might want to check banks, credit unions, and online lenders to compare maximum limits.

• Funding timelines: Business credit lines may have faster funding timelines than other types of loans. But even so, the application process, approval and funding timelines can vary by lender. Review timelines, and compare your options.

• Repayment terms: Business credit lines typically have more flexible repayment terms than traditional loans. Some lenders may require a monthly payment that's a small percentage of what you borrowed or a minimum flat amount. Some lenders also deduct payments from your business checking account.

• Potential fees: When researching your options, be aware that some lines of credit have annual fees. Check for origination, application, or inactivity fees as well.

• Customer service and reputation: You can access business credit lines from various financial institutions or online lenders. But you want to work with a company that offers solid customer service and has a strong reputation. Check the company's Trustpilot and Better Business Bureau (BBB) ratings.

Final Thoughts

Equipment purchases are often a vital part of business. Using business credit lines to buy new equipment provides a flexible financing option. You don't have to tie up your cash into a costly asset all at once. Instead, you can buy what you need now and pay it back over time based on your loan terms.

While equipment loans and equipment leases are also an option, business lines of credit provide maximum flexibility. Startups often have unexpected expenses aside from necessary equipment purchases. A line of credit gives business owners a versatile financing tool to handle a wide range of expenses.