Jul 12, 2021
What is machinery financing?
Whether you are running a large or small business, chances are you need specialist machinery or equipment for its smooth running. While their cost may seem minimal, you will need a lot of the equipment if you are starting a business or you are a supplier, so their cost can quickly add up.
Paying upfront for the equipment will be out of the question because of the financial strain, which leaves you with one other option: machinery financing.
It’s no surprise to the Equipment Leasing and Financing Association (ELFA), as they found that 79% of US businesses use leasing or loans to acquire equipment. If you’ve ever wondered what machinery financing is or what it can do for your business, here’s a blow-by-blow analysis of this funding game changer.
Used interchangeably with equipment financing, it refers to obtaining an equipment loan or equipment leasing funds to secure essential business equipment or machinery.
You can use the business financing for the equipment lease or for purchasing a physical asset, such as a company car, filing cabinets, or commercial oven. This small business loan is different from heavy machine financing as that refers to funding for heavy-duty manufacturing equipment or heavy machinery, such as bulldozers and excavators.
Further, machinery finance provides funding for a physical asset, unlike other forms of financing like working capital loans. That’s because the acquisition serves as the collateral for the loan.
Machinery financing means funding for any sort of equipment that’s essential to the business. For example, if you work in the IT industry, you can get equipment funding for setting up a data center.
This financing solution ensures you get all the machinery or equipment you need to keep your business running without having to pay a hefty upfront, causing cash flow challenges.
Type of equipment or machinery covered by equipment financing
These include:
- Office furniture
- Vehicles
- IT apparatus
- Farm machinery
- Medical equipment
- Commercial kitchen tools
Where to get equipment finance
Conventional financing: The most common typing of equipment financing comes from traditional lenders. At 43%, ELFA notes that they are the most popular too.
If you have dealt with conventional lenders, you are familiar with their stringent lending terms, and it’s on full display with machinery financing.
A machinery financing company will often expect a borrower to have impeccable credit ratings and exceptional financial statements. Consequently, these types of loans are more suited to established businesses. The great thing about them is their competitive rates and favorable loan terms.
After assessing their business needs, the most popular equipment financing options business owners should consider are short-term loans, business term loans, and business credit cards.
Whatever their choice, the loan will be for a fixed period, with fixed interest rates, and will involve periodic repayments, typically monthly payments.
Online lenders: Are more liberal in their approach to credit scores and business track records. Therefore, their business model is riskier, explaining why they have less favorable loan terms and interest rates.
On the other hand, their loan application process is shorter and less taxing, while the time between loan application and loan disbursement is likely to take less than three business days.
Hot tip: the loan and repayments terms will depend on the following:
- State of the equipment or machinery
- Your creditworthiness
- How long you have been in business
- Number of years you want to repay the loan
If you seek to buy/lease new equipment or machinery, it will have a longer lifespan than used equipment. As a result, you should expect extended repayment periods and significant loan amounts.
Similarly, if you have been in business for long and have good credit, you are likely to get better terms and competitive interest rates than someone with a bad credit history. Just note that the loan or leasing options will not be longer than the expected lifespan of the equipment or machinery.
The best alternative to equipment financing ‘digital net terms’
If you are a supplier of machinery and equipment, then you understand how expensive it can get. Most businesses are unlikely to have the cash to pay for the equipment upfront. That means the customers purchasing your equipment expect to pay on 30 day or 60 day net terms.
If you don’t offer net terms, it will likely hurt your sales and your customers will use a supplier who does offer net terms. Floating net terms yourself can put a massive strain on cash flow, you need to keep on restocking, yet there’s a time gap where no money is flowing into the business.
One of the best ways to mitigate the cash crunch is using Resolve, a net terms and credit management solution.
Resolve offers accounts receivables service where you can leverage your unpaid net terms invoices for advance payments within 1 day. They will follow up on the invoice payment when it falls due.
Here’s why Resolve is better than conventional invoice factoring solutions:
- Business credit checks: they have a robust credit-checking engine that analyses customers and tells you who deserves net terms, and for how long. That way, there’s little chance of extending credit facilities to undeserving clients.
- No hidden charges: Resolve lays all its charges bare on the table and will not surprise you with extra costs down the road.
- Non-recourse financing: once you receive the cash, you don’t have to settle the invoice if the customer fails to pay the debt, as you would expect from other factoring companies.
- No chasing of payments: when you hand over the invoice to Resolve, you can wash your hands off it since they will be in charge of chasing its payment from your customers.
Try out Resolve’s accounts receivables solution, the best way to make equipment purchases without negatively affecting cash flow. Learn more about how Resolve can manage your existing net terms program for you.
Pros and cons of equipment financing
Pros
- Cash flow guarantee: equipment loans free up working capital to run daily operations.
- No large upfront: get your desired machinery and equipment without having to pay a hefty purchase price.
- Best terms and rates: offers the best terms and lowest interest rates.
- Significant tax benefits: the interest paid is tax deductible, and you also get a depreciation tax benefit.
- Even startups and small businesses can qualify: since the equipment is collateral, most lenders won’t emphasize your creditworthiness. Instead, they care about the machinery’s worth or your customer’s credit score, such as Resolve’s 'better than' invoice factoring solution.
Cons
- Most equipment financing companies will require you to make an initial down payment.
How does equipment financing work?
The equipment financing company will extend the loan to help you purchase machinery or equipment meant to run the business. For instance, if you run a restaurant, that could mean an oven, fridge, and commercial stoves.
They use the equipment as collateral. After giving the equipment a fair market value, the lender will ask for your personal guarantee or additional collateral if they decide it is not sufficient.
The financier will then forward the loan amount, less origination fees. They will use this figure to calculate your total cost of borrowing and monthly payments.
You will own the machinery when you pay for it entirely. Otherwise, the lender will repossess it if you fail to pay.
If you chose the lease option financing program, unless you agree to a buyout, the equipment will remain the lender’s property after the contract ends. Terms of the loan require you to make periodic payments catering for the principal and interest, payable within a fixed period.
Qualifying for an equipment loan
Each lender has its requirements for extending funding facilities. That said, this is what they would typically look for:
- Personal credit score. The higher your credit rating, the better. It also helps to prepare personal financial statements.
- Details of your business operations, including statement of accounts, annual revenue, business plans, and balance sheet or cash flow statement.
- A minimum number of years in operations. For bigger loans, the thresholds could be as high as two years in operation and annual revenues over $250,000.
Resolve has a unique way of tackling this, as they will analyze your customer’s creditworthiness. They will run their data through their credit check, and will advise you to extend them credit terms for either 30, 60, or 90 days if they qualify.
Resolve will send up to 90% of the invoice total to you as you wait for the customer to settle the invoice.
To sum up, Buying business machinery or equipment need not cause a financial headache as machinery financing can come to your rescue. It involves taking out a loan or lease as you pay for it at your own pace.
One of the best ways of achieving this is using Resolve’s net terms management and accounts receivables solution. Request a demo today to see why it is cheaper, safer, and better than conventional invoice factoring.
