How to Finance Equipment for your Small Business
Once you start your business, there are several necessities that need to fill up to avoid wastage of time and manpower. And one such important requirement is equipment. When you want equipment, picking the right lender can help in funding you require and solve the obstacles from inappropriate loans or unscrupulous lenders.
In this blog you will read how to approach the lender, how to prepare your application and important steps.
1. Analyse your credit history and solve any issues :
Creditworthiness is one of the most important considerations for lenders of business owner. There are several kinds of loans available even if your credit is less-than-perfect but it is advised to clear up the problems before applying for loan. Go through your credit reports; fix all the errors clear any outstanding bills.
2. Prepare a list of required business equipment and check each item’s cost and usefulness :
While granting loan, lenders will go through the cost as well as useful life of each equipment. They accept each tool’s expected life to be in service to make sure they are not providing loans which will outlast equipment’s life.
Prior to applying for loan for financing purchases, give a thorough check to tools needs, cost and usefulness of each component.
3. Understand your financing options :
There are several small business loans available from a variety of sources such as traditional banks to non-bank alternative lenders. But keep in mind that not all loans will cover all equipment.
Go through the below points to understand the uses, advantages and disadvantages of each loan provider :
> Traditional Banks
In simple words, banks lend on the basis of a business’s cash flow not on equipment’s value. Therefore, established businesses can qualify for loan easily while start-ups with lack of revenue and financial history have to work hard to availing the same.
Pros: Best option for small and large equipment purchases as loans are available at low interest rates with advantageous repayment terms
Cons: Businesses need to have a strong credit and financial history. Not a good option for start-ups or business owners with weak credit histories.
> Small Business Administration
The best alternative for start-ups or small business based in U.S. is ‘Small Business Administration (SBA)’. It provides guarantees to loan providers instead of making direct loans. It guides them how to incentivize them to fund small businesses. Their programs include microloans for small equipment purchases and 504 loans for big equipment.
Pros: SBA-backed loans are accompanied with several benefits such as they come with competitive rates and terms, useful for both start-ups and borrowers with imperfect credit and easy to qualify for it than traditional bank loans. Besides they are available at good interest rates & repayment terms and its different loans cover small and large equipment
Cons: The process of application and processing is longer than expected. It also requires personal guarantees on the loan along with sometimes, additional collateral.
> Community Development Financial Institutions (CDFIs)
CDFIs include credit unions and mission-based lenders such as non-profit organizations. The best thing about CDFIs is they specialize in under-served small business populations of women, minorities and low-income entrepreneurs. These funds are made for working capital purposes, of which the equipment purchase is an allowable use.
Pros: Easy to qualify, quick loan-processing time and longer repayment terms. CDFIs offer several range of educational programs and assistance to small business borrowers.
Cons: There is a limit for loan of up to $100,000 and might have higher costs than traditional banks or SBA-backed loans.
> Alternative lenders
This kind of funding includes peer-to-peer financiers which specifically don’t fund equipment but they finance working capital requirements. They make lending for daily or weekly receipts and are considered cash-flow lenders.
Pros: Borrowers can easily qualify and takes less processing time.
It is advised to go through each option and pick accordingly as best business loan will be available on your personal/ business credit worthiness and kind of equipment.