So you’re looking to take out an equipment loan, but you’re not sure where to start.
We asked nine business leaders, “If you could go back to when you were about to take out your first equipment loan – what would you tell yourself?”
Here’s their advice.
Plan for the Future
Equipment loans, like car loans, are typically short term. 3-5 years. The payment on the 5-year loan always looks more attractive than the payment on the 3-year loan because it’s quite a bit lower, but lower isn’t always better. A 5-year loan will cost you more actual $’s than a 3-year loan. If you can handle the 3-year payment, it’s always better to have your debts paid off sooner. It saves you actual $’s and you will own the asset outright sooner.
Decide to Buy or Lease the Equipment
With the equipment loan you acquire, you need to figure out if you are going to use this new capital to either lease or buy the equipment needed for your business. Buying equipment usually requires 20% down and the equipment used as collateral while leasing is a less risky option. Another great option is to look for slightly used equipment because they are available at significant savings. Evaluate the needs of your company and make the decision early on.
Prepare All Your Documents
A lot of paperwork and documentation goes into obtaining an equipment loan. You’ll need credit reports and business plans, proof of ownership, cash flow statements, a balance sheet, tax returns, bank statements, insurance policies, and any applicable licensure. Having all these documents located and ready to go will speed up the loan process.
Consider Your Options
All small businesses will eventually require some kind of loan to keep operations running smoothly. Consider all the loan options offered to small businesses and do your research before moving forward with an equipment loan. Make sure it is the right fit for your business needs.
Only Take Out a Loan if You Will Be Able to Pay it Back
Only take out a loan if you have the cash flow that would enable you to pay back the loan in a realistic timeframe. You should ask your equipment financing company about warranties, return policies, and any refinance options that may be available.
Exhaust All Other Options First
I believe the best question to ask is “Do we really need this right now?” and the second question would be “Have we examined all of our options and possibly missed a creative solution sitting right in front of us?” For example, you could go finance a bunch of expensive new office furniture or find “good enough” furniture on a secondary market such as a surplus store for pennies on the dollar.
Assume Your Loans
Are you thinking of selling or leasing your business in the next 3-6 years? If so, the new owner will have to assume your loans. If they have a different business plan than yours, it becomes a huge problem. You may be liable for the loan if the new owner reneges or goes out of business during that period. I recently sold my company and held money for the purchase. The new owner also signed that he would assume the loan. He went out of business and I had to make good on the loan even though I had no company and no need for the equipment.
Is it a Need or a Want?
After taking out an equipment loan for a recording device to use in our UK recording facility, I would’ve really asked myself if the item was a need or a want. Will this item add to our bottom line or be another to add to the collection. I think that’s the main issue, financing equipment you need rather than because you can.
Develop a Long-Term Relationship
If you’re looking to take out an equipment loan, you’re likely going to take out a loan in the future. Rather than jumping into the standard, “What’s the rate?” question, look to develop a long-term relationship with a lender. This likely won’t be someone at a large national bank. PPP funding has taught me that having a relationship with a small, local lender or broker is one of the top business relationships to have. Don’t jump into the rate. Jump into getting to know someone who can help your business for years to come.