When a small business begins to expand, a lot of changes will need to be made to accommodate the rapid growth. Such changes often include hiring an accountant, consulting a tax agent and getting new equipment.
For most growing businesses, acquiring new assets upfront represents a significant investment. To meet the demands of growth, small businesses may have to build up their funds for a significant period of time. This can disrupt their cash flow, taking money away from other areas of the company like advertising, marketing, rent, necessary licensing and so on. In the long run, this could be detrimental to the business.
By making use of vehicle and equipment financing you can get all the assets that you need in a shorter period of time without the major upfront costs.
In this blog, we’re going to take a look at the key things that you need to know about vehicle and equipment financing. We will discuss the different options as well as the pros and cons of the process.
Loan vs. Lease
- Vehicle and Equipment Loan
If you require particular assets to run your business, you can take out a loan with a bank or a lender to purchase those assets. The assets that you bought will act as security for the lender. As with any other loan, you will be required to make periodic payments over a fixed term. These payments will include interest and principal payments. In this case, you will own the asset unless you default on the loan. The lender will gain possession of the assets if you’re not able to make payments.
In order to take out a business loan, the bank or lender will often require personal and business credit scores, a balance sheet, a cash flow statement and other documents that show the financial standing of your business. You will likely also be required to provide a business plan and detailed proposal for growth. This information will be used to see whether or not your business is qualified for the loan and can afford the necessary repayments.
Compared to leasing, the process of qualifying for a loan can be a bit difficult. However, since you get to own the assets, a loan can be more beneficial in the long term. According to NAB, most businesses choose the loan option, with equipment loans making up 77% of the market.
- Equipment Lease
With this option, it is the bank or the lender that owns the assets. These assets will be leased to you for a fixed rate and you’ll need to pay that rate over an agreed-upon term. Once the term ends, the assets will be returned to the owner unless you renew the lease or buy the assets outright.
There’s also a hire purchase agreement. This is where the lender owns the assets while you make repayments towards ownership. At the end of the term, you gain possession of said assets.
Generally speaking, it’s easier to get a lease than it is to qualify for a loan. However, there are considerable risks in leasing business equipment. For example, if you happen to lease the assets longer than intended, it could cost you more money than it would to just buy the asset outright.
When going for a lease, be sure to plan as much as possible. Figure out how long you’re planning to use the leased equipment and whether or not you’ll buy the assets at the end of the term. This information will help you decide on which financing option is more suitable for your needs and, more importantly, your budget.
Pros and Cons
Now that you understand the options, it’s time to look at the pros and cons of financing vehicles and equipment.
- Helps build credit
If you take out a business loan and make the repayments on it, you’ll be able to improve your business credit score. In the future, a good credit score will make it easier for you to take out more loans and help your business grow further.
Since you don’t have to pay the full price for the assets upfront, equipment financing is a very accessible option for most small businesses. It will allow them to get the assets that they need without having to disrupt their cash flow.
- Can be more expensive in the long run
If you don’t plan out your finances properly, you could end up paying more than is necessary. This could be due to a lengthy leasing period or taking out a bad loan on a depreciating asset. To avoid this, we recommended consulting a reliable financial advisor before you make any commitments.
- Can lower your credit score
Equipment financing can help you build credit, but it can also adversely affect your credit score if you can’t make repayments. If this happens, you will have a difficult time taking out loans in the future. This can then hinder your ability to run and grow your business.
That was just a quick overview of vehicle and equipment financing. If you have further questions or other concerns, be sure to consult a trusted financial advisor. Not planning out your next steps could put you and your business into a lot of financial trouble. Even if something seems advantageous from the get-go, it’s still a good idea to think things through with a financial expert.