By financing heavy equipment, an organization can avoid tying up its liquid assets while still making those crucial investments in the tools that will allow them to grow.
Before applying for a commercial equipment loan, there are several factors you should consider to make the best possible decision for your company.
Consider your company's liquidity and financial status
When applying for a commercial loan for industrial equipment, it’s important that you know where your organization stands financially. Equipment loans are ideal for preserving liquid capital within your organization. They create flexibility within a company, allowing it to continue paying fixed costs and business expenses without sacrificing productivity or potential incremental revenue.
Although it can be tempting to rely on commercial loans as a bridge loan between large contracts, this is not what commercial loans are intended for, and using them in such a way can result in overleveraging your company’s assets for stopgap solutions.
A good credit score is always an asset for commercial lending
Much like with consumer debt, credit scores are a good indicator of good financial habits within a commercial enterprise. If your company has a good credit score, a commercial lender may be able to offer better interest rates on heavy equipment loans as well as favorable repayment terms.
Having a good business credit profile also makes commercial lending applications easier for lenders, as they may be more likely to approve the loan without requiring extensive collateral or personal guarantees against the new loan.
Think about repayment term lengths and project completion dates
When considering a commercial loan for heavy equipment, it’s important to keep the business objective in focus. Whether it be a specific project or business activity, commercial equipment should be purchased with a goal in mind.
Although this can vary significantly between different industries, understanding the lifespan of a piece of equipment, the depreciation it will incur, and the resale value can help an organization find the best financing solution for every scenario.
Whereas medical equipment and technology are constantly being upgraded and often need to be replaced every few years for safety reasons, construction equipment such as bulldozers and dump trucks are known to retain an excellent resale value after initial depreciation. Should a large project only last 1-2 years for a company, there is always a possibility for them to resell the equipment, thus reducing operational costs and injecting capital into the company.
If the equipment is something you predict will be used regularly within your operations for years to come, longer repayment term lengths are a viable option that can help your company keep more money for other expenses.
Equipment leasing vs buying industrial equipment
How often does a piece of equipment need to be replaced? What is the life expectancy of that equipment? How vital is it to your day-to-day operations? Depending on the answers to those questions, you may find that leasing certain commercial equipment is a smarter financial move for your business. Some equipment becomes obsolete quickly and requires frequent upgrades.
There are advantages and disadvantages to both options, and they must be weighed before making a decision on buying or leasing heavy equipment.
When leasing a piece of commercial equipment, you have the advantage of knowing that your asset is under warranty while saving upfront costs, freeing up your commercial lines of credit. This also enables you to trade-in the equipment if a newer model of that equipment becomes available or if your operational needs change. The downside is that you will be responsible for maintenance costs, taxes, and insurance, which could dig into your operating capital. You’ll also need to consider the nature of the lease to see if you have the option of owning the equipment at the end of the commercial lease agreement. This can help you keep equity within the company without having to plan too far ahead.
When buying a piece of heavy equipment, the upfront costs for a down payment will be higher, but the monthly payments will be lower when compared to a leasing agreement. With an equipment purchase, you get the freedom to use the equipment as you see fit. Repairs and regular maintenance will be an expense your company will need to incur. However, if the equipment is still in your organization's possession after the warranty has expired, you will have the freedom of choosing a maintenance service of your choice.
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