What Types of Small Business Loans Are Common for buying Equipment?
Small businesses need to obtain financing and instant business loan to support a variety of business aspects from covering payroll, business expansion, as well as for terminating less beneficial debt. One of the most common reasons that smaller companies borrow money is to finance the purchase of equipment to use in their own business.
Equipment can be financed in a variety of different ways. One way in which it is commonly done so is through financing that is provided by the seller or manufacturer of the equipment as an incentive to purchase it. These sorts of agreements commonly provide an attractive financing package but may not provide the lowest cost for the equipment and companies that finance their equipment purchase through these means may find it more attractive to negotiate the terms of the equipment price and financing package as two separate transactions.
As an alternative, a company can take out an equipment loan from a third party financing company, typically a bank or some other financing organization. The structure and terms of these agreements can vary significantly but the most common type of equipment financing agreement includes a standard loan term and repayment of this loan as the equipment ages. The lender in these sorts of equipment loans will commonly maintain a first lien on any equipment purchased with the loan and may request additional security and guarantees if the equipment will depreciate quickly.
Another option for small businesses are equipment leases. Equipment leases may not seem to be an loan and rather a rent to use equipment but are often to be considered to be disguised loans that are really financing agreements. In equipment leases the finer points in the language are the true difference maker; equipment leases that offer bargain purchase options later in the agreement or have sharply lower equipment purchase options are commonly considered to be financing obligations in disguise.
In addition, equipment that depreciates during the lease terms, or equipment that has a shorter life associated with it, is commonly considered to be a financing option in disguise. Equipment leases are good options for small businesses who don’t want to commit to buying equipment, particularly in their early stages when they may not be aware how successful their business might be, but may want to retain the option to buy the equipment at a future date if it is advantageous to do so.
Small businesses meet many challenges at the start of their business lives, and financing equipment is no exception to this. Since small businesses do not have extended earnings histories financing equipment that is essential for their business model can be truly challenging. Leasing equipment yet retaining options to buy the equipment at the end of the lease term, obtaining a financing option from the equipment manufacturer or a third party financing company, or simply renting the equipment may be the best option for a small business in its initial stages. Consideration of the facts and circumstances are necessary but also provide businesses with the ability to run and operate their business.