For construction, manufacturing, and trucking companies, business starts and stops with equipment. Obtaining a bank loan is a traditional way of acquiring the money that's needed to purchase mission-critical equipment and machinery. However, innovative business models are shifting the way that these companies acquire these essential items.
According to the Small Business Administration, 85% of businesses lease equipment. Here are some reasons why so many companies turn to equipment leasing instead of purchasing equipment with bank loans.
Nothing says that your team is ready to do its best work like updated equipment. Advertising that your company uses the latest technology is a great way to build your brand, whether you sell to consumers or business clients. It's also a good way to attract skilled workers who are looking for career opportunities with a forward-thinking company. However, outfitting your business with the latest equipment and machinery in your industry can be a costly endeavor.
Capital equipment in the construction, manufacturing, and trucking industries are built to last decades when properly maintained. It's not uncommon to see an established company shuffle out a 30-year-old piece of equipment to start a project. It's also not unusual for that same piece of equipment to require a repair before the project ends. Business owners know that frequent equipment repairs cause schedule delays that can impact their profit margins and hurt their reputation in the marketplace. Why do they put up with outdated equipment? The simple answer is cost.
Buying a new piece of equipment before you've gotten the full life out of the existing equipment equates to a loss on your books. Also, it won't be long before the newly purchased piece of equipment is superseded by one that has more technologically advanced features. If you want to carry the latest equipment that can tackle any project in the foreseeable future while keeping costs in check, consider equipment leasing instead of buying with a bank loan. An equipment finance agreement for leased equipment features reasonable monthly payments and negotiable lease periods. At the end of the lease, you simply turn in the equipment and sign up for new items.
Maintenance represents a big expenditure for companies that rely on heavy equipment to keep their operations going. Some maintenance activities are needed for immediate operations. Others are accomplished to prevent future breakdowns.
When you get a bank loan to purchase a new or used piece of equipment, the cost to maintain the equipment rests fully on you. However, this isn't always the case when you lease equipment. Both you and the equipment leasing company have a vested interest in keeping leased equipment properly maintained.
Based on the terms of your equipment finance agreement, you'll be on the hook to return the equipment in good condition, with the exception of normal wear and tear. The leasing company wants the equipment returned in the best possible condition so that it can lease the items again to other clients.
Most equipment lease finance agreements spell out which parties are responsible for various types of maintenance. It's common to have a leasing company pay for the majority of equipment maintenance for leased semi-trailer trucks and other pieces of equipment.
Ideally, companies plan to acquire equipment at certain times. They are usually replacing old items or getting equipment to start a new venture. However, there are times when pieces of equipment fail, and companies need to replace them in a hurry. During these times, the benefits of getting an equipment lease versus a bank loan really become apparent.
To get a bank loan for equipment, you'll need to provide the bank with several years' worth of financial statements and tax returns. After gathering this documentation and submitting it through the proper channels, the bank's analysts take several weeks to review the financial records, approve the loan, or ask you for more information. Also, the chance of having your loan declined is high.
To get an equipment lease agreement approved, you'll submit a limited amount of financial data to the leasing company or the financial institution. Many agreements are single-page documents that take minutes to complete and only a couple of days to review. The chance that your agreement will be approved is much higher than it is for getting a bank loan approved.
Companies that need their equipment in a hurry usually want to use the equipment to increase revenue. While most business operators have long-term profitability goals in mind for new equipment, they don't ignore short-term cash-flow conditions. If you decide to get a bank loan on equipment, you'll need to pay a down payment that's usually a percentage of the total loan amount. Banks that lend on equipment require down payments to minimize their risks.
If the bank approves your loan, it will calculate your down payment percentage based on your personal and business credit worthiness. It's not uncommon for businesses to pay up to 25% of the loan as a down payment. This high financial outlay can cause short-term cash-flow problems for many small to medium-sized businesses. The problem can potentially drag on into the future since many bank loans come with variable interest rates. This means that your payments can go up from one period to the next based on market conditions. This unpredictability is a big risk for many companies.
Equipment leases require low to no down payments. Equipment lease agreements usually feature fixed payments that are paid evenly across a specific lease term. Some financing companies require businesses to pay one payment in advance to start the agreement. The payment is applied to the lease. Other companies fully finance the lease and require no down payment.
One of the most prominent ways that banks seek to minimize their risks while lending money for equipment is by collecting collateral. Per the terms of your loan, the bank can place liens on all of your company's assets. If you can't repay the loan according to the agreement, the bank can take you to court and force the liquidation of your company's assets to pay the debt. This is a worst-case scenario of course. At best, your company's status as a debtor is made public with a UCC filing.
When obtaining an equipment lease, your company's assets are usually not required to secure financing. Many equipment lease companies use the leased equipment itself as the collateral for the lease agreement. Collateral requirements are often based on your credit worthiness.