Equipment loans for new businesses: What you need to know

The outlay of capital required for machinery and equipment investment is a common challenge that small and medium businesses face. In fact, it’s not just the initial purchase that can prove difficult. Even the ongoing maintenance and necessary repairs or upgrading can prove costly.

In this article, we’ll introduce you to everything you need to know about equipment loans for new businesses. As always, if you would like more information or would like to discuss a tailored solution to suit your needs, make sure you contact the ScotPac team directly.

An Introduction to Equipment Loans for New Businesses

Equipment finance is a type of loan that is designed to allow commercial entities to buy the equipment, tools, machinery, or other assets they need to run their operations. In most cases, an equipment loan is secured with the assets being purchased used as collateral.

Equipment loans can be used to purchase brand new equipment or second-hand machinery, but it is important to consider the specific terms and conditions with your lender as the agreements can vary.

Terms

In the majority of cases, equipment finance for new businesses is tied to the lifetime (or expected lifetime) of the particular asset in question. This can vary between one and five years, though longer terms are not out of the question necessarily.

As part of the loan, you will likely make monthly repayments of a set amount (plus the incurred interest) for the lifetime of the loan. In instances where a balloon payment is required, there might be a larger final payment at the end of the term.

Interest Rate

The interest rate is set by the lender by taking into account a number of different factors including the type of equipment being financed, the type of loan, the terms of the loan, your eligibility and other external market factors.

Equipment Types

As mentioned before, both new and used equipment can be financed with a loan. There are, however, a wide variety of different types of equipment that can be bought through equipment finance. These can range from vehicles and machinery to tech equipment and IT systems. Unfortunately, commercial real estate does not come under the category of equipment and will need to be financed separately.

As long as the asset is both tangible and can be evidenced as being necessary for the day-to-day operations of the business, it is likely eligible to be financed.

Eligible Borrowers

Both small and large businesses can apply for equipment finance. Of course, new and start-up businesses are likely to be in a greater position of need considering the lack of cash flow and access to working capital.

The terms of the finance agreement will depend a lot on the particular details of the company involved and equipment being bought.

In any event, using equipment finance can be very beneficial for a number of reasons.

1. It prevents the need of having to outlay a large sum of money upfront.
2. There may be tax benefits and positive implications involved.
3. It helps to ensure access to working capital to ensure the continued growth of the organisation.

Types of Equipment Financing

The specialists here at ScotPac are best able to provide advice on the particular type of equipment finance that suits your business.

Each type of finance comes with its own advantages and disadvantages, so it’s vital you consider the particulars of your needs and situation before signing on any dotted lines.

Some common types of equipment finance include:

•  Novated leases
•  Finance leases
•  Operating leases
•  Business loans (unsecured)
•  Chattel mortgage
•  Commercial hire purchases

The question of whether you should be purchasing new or second-hand equipment depends largely on what you need. The decision will also impact your ability to or the scope of your finance.

New equipment, for example, might be better suited to new companies looking to invest in assets to be used over the long term. Reliable, quality, and brand-new equipment is likely to last longer and update later than older or pre-used equipment. Plus, if it’s new, there may even be warranties to cover breakdowns or repairs.

On the flip side, the obvious disadvantage is that new equipment costs more than second hand equipment and depreciates at a faster rate. Used equipment can often be found at discounted prices and can be of equally high quality. It also may be challenging to find a reputable financier to fund pre-owned assets.  

Balloon Payments

While we briefly mentioned balloon payments above, it’s important to understand what these types of equipment loans mean.

A balloon payment works by decreasing the cost of the monthly repayments but includes a larger lump sum payment that is due at the end of the loan contract. Instead of paying a deposit upfront, this is a ‘deposit’ due at the end. It can be a smart consideration for businesses in need of greater cash flow and expecting to be in a better position at the end of loan term.

It is vital for your financial sustainability to consider whether a balloon payment is the smart economic decision for your business. We recommend discussing this with your lender directly.

How to Get Equipment Finance

Access to equipment financing for new business is dependent on the amount of money you’re looking to borrow, the type of finance you’re after, and the particulars of your business and situation.

Lenders, whether traditional banks or otherwise, will likely require proof of your business’s registration, financial records, and information about the equipment you’re seeking to finance. 

Shared from ScotPac