It’s a field that has exploded in some industries over the last few years and when you take a look at the benefits, it’s no surprise why.
However, there are some crucial need-to-knows when it comes to capital equipment financing. Get some of these areas wrong and you really can be paying through the nose for your new equipment, which obviously defeats the purpose altogether.
Taking this into account, let’s now take a look at some of the main facts that you should be aware of before entering one of these types of agreements for your equipment.
Try and obtain your finance when the equipment is brand new
Some businesses like to “wait it out” and only find a loan for their equipment when their cash reserves start to get lower. In other words, they buy the equipment on one date, then in the future they seek finance.
Well, this is only going to work against them. One of the big advantages for lenders when they assist with new equipment is that they know the price – and know what it’s going to be worth in ‘x’ years. If they start to lend on used equipment, such securities go out of the window. It means that you are less likely to be accepted by some lenders, while you also might be subject to a tougher deal.
Beware of the difficulties of specialty equipment
On the face of it, capital equipment financing is an absolute dream for businesses. However, if your business happens to use specialist equipment, sourcing finance might prove slightly more difficult.
One of the reasons why lenders are so keen on capital equipment financing is because they have so much collateral available. In other words, if you default, they know they can turn to a functional piece of machinery.
If you happen to deal with specialist equipment, a risk immediately enters the situation. If you do default, are they going to be able to do anything with the equipment? Is it going to have any resale value? This means that you might be subject to slightly more stringent requirements than those who are looking for so-called standard equipment.
Financing for a period of time that’s too long in comparison to the lifespan of the equipment
This is something of a “schoolboy error”, so to speak.
One of the worst decisions you can make in relation to this equipment is entering an agreement which will surpass the lifespan of the machinery itself. In other words, if you know that you are going to have to renew the equipment after five years, but your loan is in excess of that time period, you are going to be paying a premium for nothing.
Naturally, the opposite situation is much better. If you can find a loan which is going to end a long time before the end of the equipment, it means that you will be paying nothing for using the equipment after a certain date.