How To Finance Equipment For Custom Parts Fabrication And Repair

Studying Your Options

Financing a tangible asset instead of paying cash upfront frees up working capital for other aspects of your business. In some cases, you may be able to deduct the interest on your tax return.

But with several options available, understanding the common equipment financing options is crucial to make an informed decision.

Equipment Loans

Small business owners often rely on equipment loans to expand and sustain their operations. An equipment loan lets you borrow money to purchase business equipment, which will then serve as the collateral. As such, you’ll get a lower interest rate compared to unsecured loans.

Equipment financing loans typically have terms ranging from one to five years, where you'll make regular monthly payments until it’s paid off. You can access this through bank loans or from alternative lenders.

Equipment Leasing

Leasing equipment is similar to renting a business asset for a certain period. A lease term may either be:

Operating leases: These are best for equipment you plan to upgrade regularly. At the end of the lease, you return the equipment or buy it at fair market value.

Capital leases: These are more like a loan in disguise. You'll likely have the option to buy the equipment for a nominal fee at the end of the lease term.

Leasing can be a good choice if you want lower monthly payments and the ability to upgrade equipment easily. However, you'll generally pay more in the long run compared to buying outright.

Small Business Administration (SBA) Loans

Are you having trouble qualifying for traditional equipment financing loans? The SBA 7(a) loan program is popular for securing costly but necessary equipment. These offer lower down payments and longer repayment terms compared to conventional loans. The agency can lend as much as USD$ 5.5 million through participating lenders throughout the country.

Vendor Financing

Equipment financing companies aren’t your only options. Some manufacturers and dealers offer lending solutions that may appeal to you. New models often have low or zero interest periods and other special discounts. Just be sure to read the fine print. Introductory rates usually jump up after a certain period.

Understanding how equipment financing works is your first step in picking the right option. But how do you pick the right one?

Choosing the Right Financing Option

Several factors need to be considered to determine the best equipment financing solution. These require you to look into your business operations and study the advantages of getting new equipment:

Cost of the equipment: For major purchases, a dedicated equipment loan or lease might make the most sense. For smaller items, a line of credit could be more appropriate.

How long you'll use the equipment: If you plan to keep the equipment for many years, buying via a loan or cash purchase is often more cost-effective in the long run.

Your cash flow: Can you handle a larger down payment in exchange for lower monthly payments? Or do you need to minimize upfront costs?

Tax implications: You might be able to deduct the full cost of equipment in the year of purchase under Section 179 of the tax code, but this applies differently to purchases versus leases. Consult a tax expert to determine whether you’re eligible for tax savings.

Your credit situation: Lenders will assess your personal credit history and business credit score before approval. If your credit isn't stellar, you might need to explore options like SBA loans or equipment leasing, which can be easier to qualify for than traditional loans.

Before seeking credit approval, it’s important to study the loan terms, interest rates, and other conditions associated with the financing scheme. This way, you’re assured that you’re getting the best value from your investment.

Tips for Success

Whatever financing route you choose, here are some tips to help you get the best deal:

Shop around: Don't just go with the first offer you get. Compare rates and terms from multiple lenders and learn the eligibility requirements for each option.

Know your numbers: Lenders want to see that you have a solid business plan and the cash flow to support loan payments. Prepare your financial statements, including your annual revenue, before you apply. A good credit score can also help you get the best terms possible and increase your chances of credit approval.

Consider used equipment: You can often get great deals on lightly used machinery, which can reduce your financing needs.

Time your purchase: If possible, try to finance equipment purchases during your business's peak season when your financials look strongest.

Ask about flexible payment options: Some lenders offer seasonal payment plans, which can be a lifesaver if your business has busy and slow seasons.

Read the fine print: Understand all the terms of your financing agreement, including any prepayment penalties or balloon payments.

Don't overextend yourself: It's tempting to go for the biggest and most advanced machine on the market, but make sure you're not taking on more debt than your business can handle.

Analyzing your business needs and financial situation are two of the most essential considerations before applying for a loan. These tips can also be applied when evaluating a home or car financing offer.

Final Thoughts

Equipping your custom parts fabrication and repair shop doesn't have to drain your bank account. The key is to choose the right solution. When studying your options, explore all possibilities, crunch the numbers, and choose the type that fits your business goals. Before you know it, you’ll be firing up that new equipment and watching your business grow.