Small businesses, just like any other, require equipment to operate effectively. Equipment financing can help small businesses acquire the necessary equipment they need to do their jobs while also preserving their cash flow. In this blog post, we will examine the benefits and drawbacks of equipment financing for small businesses, discuss the different types of equipment financing available, and provide some real-life examples of how small businesses have used equipment financing to their advantage.
Benefits of Equipment Financing for Small Businesses
Equipment financing, in general, has a lot of advantages for small businesses. The following are some of the most significant ones:
1. Cost-Saving
Acquiring equipment outright can be expensive for small businesses, and it can leave them short of working capital. Equipment financing is a cost-effective alternative to purchasing pieces of equipment outright, which allows them to conserve their financial resources.
2. Flexibility
Small businesses' needs can be unpredictable, and their operation may require them to be adaptable. Equipment financing provides some flexibility, because of its customisability, financing options, and payment terms.
3. Access to Newer Technology
Outdated technology can be limiting. Equipment financing can provide an opportunity to access advanced and up-to-date equipment that can help streamline processes, improve efficiency, and help small businesses stay competitive in their respective markets.
4. Tax Benefits
Equipment financing translates to significant tax advantages for small businesses, too. Interest paid on equipment financing can be tax deductible, which thereby minimises tax obligations.
Drawbacks of Equipment Financing for Small Businesses
Although equipment financing has several benefits for small businesses, it can also be challenging in some ways. The following are some of the most significant drawbacks to consider:
1. Stretched Out Repayments
Equipment financing implies a long term commitment. It may require businesses to commit to longer payment terms, which can stretch out their budget and put pressure on their income streams.
2. Additional Costs
Equipment financing doesn't mean paying only for your equipment's upfront costs. You'll also be charged additional fees, including interest rates, service charges, application fees, appraisal costs, and overdraft fees.
3. Collateral Requirements
Collateral is often required by equipment financing providers to offset their risks. This may mean putting up personal assets such as homes or vehicles, and this could be a significant obstacle for some businesses.
Equipment Financing Options for Small Businesses
There are several ways small businesses can finance their equipment. It's essential to consider the pros and cons of each financing option and determine which one works best for your small business. Below are some of the most common equipment financing options.
1. Equipment Lease Financing
Equipment lease financing is a popular option for small businesses. It enables businesses to rent equipment for their business, with the option to purchase the equipment outright when the leasing period is over. This financing option provides the flexibility of customised payment plans and low upfront costs.
2. Equipment Loan Financing
Another option is to borrow money to purchase equipment. In this case, you will be responsible for paying periodic installments until the debt is entirely repaid. Equipment loans provide higher flexibility and control for small business owners.
3. Equipment Sale and Leaseback Financing
This financing option involves selling your owned equipment outright and then leasing it back to your company from the financier. This method provides working capital and tax benefits for the business, as well as enabling continued use of valuable equipment.
Real-Life Examples of Small Businesses That Have Used Equipment Financing
Numerous small businesses across different industries have benefited from equipment financing. Let's take a look at a few examples:
1. Backyard Products
Backyard Products, a manufacturing company making outdoor equipment, used equipment financing to acquire new equipment. It allowed the business to increase productivity, enhance manufacturing capability, and link together its operations. This financing option resulted in a 20% increase in sales and a 10% reduction in costs.
2. Rackspace
Rackspace, a web-hosting company, hired equipment providers to manage their equipment requirements. The company found that leased equipment enabled them to keep more cash in reserve and have greater financial stability and flexibility. Its financing options enabled it to maintain new technology, improve productivity, and safeguard the business's cash flow.
Conclusion
When deciding whether to pursue equipment financing, businesses should evaluate each potential funding option's costs, benefits, and drawbacks, and take the time to confirm with a financial advisor. In this way, they can make informed decisions and select the best equipment financing option for their business's goals, which can free up valuable capital and enable them to expand and improve their operations. Please, speak with the experts and determine what equipment financing options are best for your business needs, and take advantage of resources that are available to you.