New Equipment Financing

Adding equipment can be a good decision if you have continuous, steady business growth, and expect that growth to continue. You may also need to acquire new equipment to accommodate a new customer or project or if you make a change or add to your current services. Replacing broken-down or obsolete machines can lead to increases in productivity, capability, and efficiency.

There is no clear-cut strategy for determining which acquisition method is best but knowing your equipment and business requirements will help you evaluate your best options and terms for leasing or financing machinery.

A few important factors when thinking about financing equipment: 

• How long do you expect to own the equipment?
• What is the expected utilization of the equipment – number of miles or service hours?
• How much and how quickly is the equipment expected to depreciate in value?
• Does the loan amortization meet your goals for potential resale or trade-in value?

When deciding on loan terms, loan duration and amortization are important items to consider. Comparing the amortization of the loan to the depreciation of the equipment will help you determine the best finance terms for your equipment acquisition. To evaluate the best options for your circumstances, answer these questions: 

• What will the remaining payoff amount be at varying intervals (24 months, 36 months, 48 months)?
• At each of those intervals, what will the equipment be worth? Consider the use application, hours of service, miles driven, and maintenance for each.
• How do these values compare? Determine whether you would be in a positive or negative equity situation at each interval.

Many focus on their short-term cash flow needs and the monthly payment amount when making equipment financing decisions. While a longer loan term can result in lower monthly payments, you may want to consider a shorter repayment term for your loan instead. 

Even though the monthly payments may be slightly higher, a shorter loan term can often allow you to save a significant amount in interest. This can have a much better long-term financial impact than a slightly lower monthly payment or interest rate. There is also the added benefit of building equity on your equipment much faster. You may then be able to use that equity to support a working capital loan for your business or to acquire new equipment.

When deciding on the terms of your loan, some other details to think about are:

• What is a reasonable payment range that works for your business cash flow?
• What balance between cost savings, current cash flow, and accelerated equity best meets your business goals?

While new machines come with the latest and most up-to-date features, they often also come with sizeable price tags. Depending on the industry, type of equipment and business needs, sometimes a less expensive used machine may be a better option.

New machines frequently provide:

• Increased capability and efficient energy use
• Improved features that increase productivity and throughput
• Lower maintenance costs

Pre-owned equipment benefits include:

• Reduced cost of acquisition compared to new machinery
• Lower depreciation compared to new equipment
• Immediate availability

As you assess various equipment options, understanding your business's requirements, challenges, and goals can help determine if new or used machinery is the right choice for your business. The right financing partner can offer options for either type of investment.

If you don’t have cash available, the obvious choice is to finance your new equipment purchase. However, there may also be times when equipment financing is a good choice even if you do have the available funds. 

Spending all or most of your cash to purchase equipment can leave you without money for emergencies or daily operation costs. Yes, you will pay interest, but you’ll also safeguard your cash flow for additional opportunities or expenses.

While functioning equipment is essential for running your business, the equity from your machines can be used for more than just resale or trade-in value. Businesses can use this equity to get working capital loans to fund operations, buy additional equipment, or borrow cash for unforeseen expenses. Without equity in your equipment, these financing options can be limited.

Some questions to ask when thinking about building equity in your equipment include:

• Are you interested in expanding your business or buying out a competitor?
• Would you ever need to replace equipment early?
• Is there a possibility that you could lose a material contract?
• What is the likelihood you may have a large unforeseen expenditure?

Banks look at your financial statements to determine the value of your equipment, but typically, they are only looking at the book value from an accounting perspective. Your equipment’s book value refers to the purchase price less accounting depreciation; the market value is the amount your equipment is actually worth, in most cases, its resale value. 

A good financial partner will not only look at the book value of your equipment but will also take into consideration the real equity you have accumulated. Finding a partner who understands your business and the value of your equipment is invaluable when you are trying to purchase new equipment, obtain capital for growth, or to meet expenses.

Their expertise can help you answer these questions:

• How much true equity do you have in your equipment?
• What are the best ways to use your equipment equity to accomplish your financial goals?

For some businesses, cash flow, liquidity, and monthly payments are most important. For others, interest rate and borrowing costs (the amount paid over the lifetime of the loan), or building equity are a priority. A longer payment term with lower monthly payments can help businesses that are concerned about maintaining cash flow liquidity. If the desire is to pay off the loan sooner and reduce borrowing costs, then a shorter loan term with higher monthly payments is a better option.