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The “Fab Four” – The Best Equipment Financing Options Can Bring Big Benefits (and Big Questions) to the Table

By June 26, 2019June 27th, 2019Business Owners, Food for thought

Business decision-makers know that a reliable path to new commercial equipment on a regular basis isn’t a luxury – it’s a necessity.

That’s precisely why it’s so important to know the lay of the land, financing-wise, when it comes to replacing, upgrading or purchasing new equipment financing.

Primarily, there are four viable options when look to finance new business equipment – a straightforward loan, an equipment lease, a business line of credit, and paying cash.

These “Fab Four” commercial equipment financing options offer unique benefits to businesses, but come with unique wrinkles and risks of their own, as corporate financial officers need to fully vet each of the four options to ultimately decide which options works best for their company.

Here’s a look at each commercial equipment financing options, and what they offer your business:

A Straightforward Loan – The most common form of commercial equipment financing, a direct loan is relatively easy to obtain, while enabling businesses to get the equipment they need without a huge outlay of cash. Corporate decision makers should know going in that different types of equipment loans exist. For example, certain lenders may specialize in specific equipment categories (like construction equipment or farming-specific equipment). Consequently, it’s beneficial to do some tire-kicking if you’re looking for a unique piece of equipment. Past that, most commercial equipment loans have much in common. For instance, they use the equipment to be financed as collateral, will evaluate your company’s credit score and years in business, and generally weigh the risk of your company repaying the loan. On the upside, direct commercial equipment loans are easy to get, offer small down payments (usually between 10%-to-20%), and plenty of lenders are available to provide a loan. On the downside, interest rate fluctuations can inflate the deal price, loan approvals may take weeks, multiple financial documents are usually required by lenders, and any delay in payments can negatively a company’s credit health.

Commercial Equipment Leasing – Commercial equipment leasing is also a viable option for cash-strapped companies. By leasing instead of buying, the company essentially pays for the use of the equipment over an agreed period of time. At the lease end, the company has the option to purchase the equipment outright, renew the lease deal, or end the lease deal. By and large, down payments are either smaller or not required in commercial equipment lease deals, and there’s no need to provide collateral or a personal guarantee to obtain the equipment lease. Additionally, interest rates are normally fixed, approval is generally fast, lease payments can be tax deductible as an operating expense, and the need for financial documents is significantly reduced. On the downside of the ledger, leasing can ultimately be more expensive than a loan or a cash purchase, depending on the terms of the deal, especially if the company opts to either end the lease or extend the ease.

Relying on Business Credit – A business line of credit is usually a path less traveled by companies looking for commercial equipment financing. On the “up” side of the equation, companies don’t have to explain to financial institutions what equipment they’re purchasing when using a business line of credit. Additionally, regular repayment of a business line of credit can boost a company’s credit ranking and help build a positive relationship with financial institutions and lead to deals that can extend beyond a business line of credit. A business line of credit, however, will require a credit check, extensive financial documentation, and can come with higher interest rates, depending on the loan structure.

Cash payments – Making a cash payment to purchase commercial equipment is an option, but only for companies that are cash flush, due to high upfront costs. On the “pro” side of the coin, paying cash for commercial equipment instead of a loan, a line of credit, or a lease can lead to cash savings in the form of zero interest rate costs. Also, there’s no loan approval process required, so the company gains the immediate benefit of getting – and using – the equipment as soon as they pay for the purchase. Companies that make their own commercial equipment purchase can also gain tax benefits, including big write-offs and even significant discounts based on the IRS Section 179 tax deductions. On the “con” side, a heavy upfront cash payment can raid much-needed company cash reserves, plus the company is “stuck” with the purchase if the equipment grows obsolete – a likely scenario for any piece of equipment that relies on technology to operate.

Make Your Choice Based on Your Unique Business Needs

Take ample time before deciding on a new commercial equipment financing decision, and make that decision based on your business’s needs – and not necessarily on what financing option worked best for another company.  If you decide a commercial equipment leasing or financing option is the best fit for your business – SLS Financial can help you get started with a simple application here.

Or, if you just want to get an idea of terms and payment options, you can get prequalified in just 2-3 minutes.

If you have any questions, feel free to call our friendly team at 816-423-8021.

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