As businesses pivot and reimagine how they can survive the changes brought on by the COVID-19 pandemic, it may become necessary to acquire new equipment in order to adjust to changing market demands.
That brings about the question of financing: Do you lease, or do you buy? What about equipment loans? Is now even the right time to consider these traditional financing routes?
As you start researching the best ways to acquire new equipment, here are common myths around equipment financing and some advice on how you can make an informed decision.
Myth 1: You can’t use financing to buy used equipment
Many business owners opt to buy slightly used equipment instead of buying new. If your business doesn’t rely on the latest technology, this could be an easy way to save money.
However, many people often assume that they can’t get an equipment loan on used equipment. That’s not totally accurate. While it might be harder to find a lender who will approve a loan for used equipment, it’s not impossible.
Often, lenders are wary of extending loans on used equipment because the risks are higher — the equipment could break, which would leave you with diminished income and less likely to keep up with loan payments, or the equipment could be difficult to sell in the event they have to repossess it. If you’re looking for a loan on used equipment, try to find equipment that is less than 10 years old and with detailed repair logs.
Myth 2: Only certain equipment is good for financing
When you think about equipment financing, you might think of large construction equipment or medical devices but not equipment common to many small business owners such as a point-of-sale system or a loudspeaker. The truth is, you can get financing for almost any type of equipment that your company needs. Statistics show that 79% of U.S. companies use some form of financing to buy equipment. For example, let’s say you own a small store that needs to add an additional self-service checkout counter in order to social distance safely. You can get financing for this equipment, which could make the difference between reopening safely or not opening at all.
Myth 3: Leasing is less expensive than a traditional loan
There are two traditional ways to pay for equipment that you need but can’t afford: buying with a loan and leasing. When you lease a piece of equipment, you are essentially paying a fee to rent the equipment long term. Once your lease is over, you give the equipment back, or, if your lease allows, you can sometimes have the option to buy the equipment at a fraction of the market value. Business owners are attracted to leasing because there are often no upfront costs.
When you buy equipment with a loan, your lender usually extends you funds that cover 80% to 90% of your purchase. You’ll need to front some of the money in the form of a down payment, and then you’ll make monthly payments to repay your loan.
Because of interest, you’ll end up paying more to your lender than the cost of your equipment, which can make a loan seem expensive. However, you own the equipment outright and can resell it at any time to recover your costs. For this reason, owning your equipment rather than leasing it could end up paying off financially down the road.
Every circumstance is different, however. Industries where the equipment depreciates rapidly, such as in IT industries where computers soon become obsolete, could be better off leasing.
Myth 4: You can’t get a loan for software
As more businesses are pivoting to remote operations, there’s increased need for additional software to improve digital processes or, in some cases, create completely new remote capabilities.
For example, simply keeping remote employees engaged has become paramount, but surveys suggest 60.8% of employees don’t read emails. Chat or text platforms that are more engaging for employees are an added business expense — on top of other digital solutions that are required for business functions such as sales and marketing to operate throughout the pandemic.
Business owners shouldn’t think that just because software isn’t a physical item they can’t get a loan on it. Software financing is constantly evolving, and there are many lenders who will work with you to finance the cost of either purchasing, installing or customizing new software.
Myth 5: Equipment financing has no flexibility
Business owners are often rightly wary about the risks of signing for too much debt or locking themselves into contracts with low flexibility. This fear represents a particularly tough catch-22 during the coronavirus pandemic as businesses might need to take on debt to survive, but failure to increase profits and repay this debt could also collapse the business.
It’s definitely a tricky position to be in, but one of the bright spots is that statistics show most equipment financing lenders are willing to be flexible with the terms of the loan. In June 2020, 92% of equipment financing lenders reported they offered deferrals, modifications or extensions to prior financing agreements. This is good news for business owners who desperately need to innovate but are afraid of what extra debt payments could do to their bottom line while they work to adjust to the new market.
Regardless of misconceptions you might have had about financing equipment previously, if you believe that a piece of equipment will enhance your business offerings, safety for your employees and customers or just overall make your life easier, work towards making it happen. Prepare the necessary documents, talk to a lender and gather all the information to help understand which financing option is right for you.