Running a business — big or small — is a difficult endeavor. This is especially true of a small business that is just finding its foothold in the market. More established businesses find their own obstacles to overcome, and more often than not, they are obstacles that are related to a lack of sufficient capital.
The fuel that drives a business is capital or, in other terms, money and its equivalence in value: debt and equity. The equity of a business is the sum total of its assets minus its liabilities. Debt is money that is borrowed, and in short, money is what fuels a business. A surplus of it helps a company thrive and a lack of it is fraught with problems.
In this article we will discuss the importance of capital for business equipment and the best way to obtain it. Whether it is for repairs or the acquisition of new equipment, US Business funding for business equipment is an essential part of keeping a business running and profitable.
Use of equipment in businesses
Almost every type of business today requires a use of equipment of one sort or another. If someone is running a retail store, for instance, they need a surveillance system, computer systems with scanning devices at the cash counter, and mechanical cleaning equipment.
If they are running a manufacturing company, then their need for equipment will be much different and the associated costs will presumably be much higher. A need for repairs might present itself more frequently, and maintenance will be a regular affair. Funds will have to be available at a moment’s notice if their business is to survive.
Generally, investment in equipment is found to be of most importance in manufacturing, mining, transportation, supply chain and construction businesses. The operations are carried out by small and medium sized businesses that either operate independently or act as outsourcing partners for bigger businesses.
There is a good scope of growth in these kinds of operations, but they are also very competitive. Productivity must not be hampered by equipment breakdown or unavailability. Fast, easy, and hassle-free financing solutions are therefore critical.
Understanding the basics of EQUIPMENT FINANCING
When a loan is obtained in order to purchase new equipment or conduct expensive repairs on existing equipment, the lender covers the risk involved by obtaining a lien on the equipment. In essence, the equipment itself becomes collateral for the debt.
Most lending agencies will not provide 100% financing for the equipment someone wants to purchase. At most, it can be expected that 80-85% of the value of the equipment will be financed by the lender, and the borrower will be required to cover the balance.
The loan will not be approved until the borrower has made a commitment to pay the balance. This is because the lender wants to have control over the equipment until the loan has been repaid with interest. Control over the equipment is exercised through a lien, which works as collateral against the debt. It should be emphasized Equipment Financing is not the same as an unsecured loan for meeting short term cash flow problems. The equipment being financed is taken as collateral as already mentioned.
Qualifying for equipment financing loan
In order to qualify for equipment financing, a running business must demonstrate a proven use of the equipment it needs to purchase. Different lenders have different approval processes in place for their own respective business financing services. Traditional lenders like big banks and financial institutions have very strict norms of approval while smaller alternative funding agencies are more flexible.
For small businesses, it is typically difficult to meet many of the qualifying requirements set forth by traditional funding companies. These lenders begin by verifying the personal credit history of the borrower. And on most occasions, they have a revenue threshold that precludes smaller businesses from obtaining the funds that they need.
With the qualifying terms and conditions aside, it should be emphasized that the general approach of big lenders simply does not favor small businesses. Even if a small business meets the qualifying criteria, the loan that it receives is expensive in comparison to what a big borrower has to pay. The interest rates are unfavorable, to say the least.