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What You Need to Know about Equipment Financing before Borrowing

What You Need to Know about Equipment Financing before Borrowing

The concept of equipment finance is relatively simple: you borrow money from a lender to purchase or lease an asset for your business. Equipment is the key point of this statement because it implies a tangible thing, as opposed to an intangible asset. An example of equipment financing would be to receive $20,000 for a company car, or $5,000 for a new lawnmower for a gardening business. Why is purchasing equipment important for the loan? It’s not really to do with the lender being a control freak, ensuring their money is spent wisely instead of thrown away (although this is certain a part of their rationale). The most important aspect here is even simpler: if you buy an asset, they can take it back off you if you fail to repay the loan.

Why Is Equipment Finance Popular?

The asset being used as collateral is a huge advantage to you. As we all know, the repayment terms on a secured loan are in your company’s favor, as opposed to an unsecured one where terms could be more up in the air. Seeing that your company is looking to purchase a large asset, the lender will understand that loaning your company money is less of a risk, and so your repayment interest may be less than it otherwise would have. Likewise, you may have more chances of being approved. This is great for small companies because five minutes ago you may not have had an asset to use as to secure your loan. Once you have acquired the loan for your asset you have to remember that you purchased the asset with the lender’s money, so it’s only “right” that they can take it off you if you fail to repay. You can see how this is mutually beneficial, and extremely conducive to growing a business on assets that you don’t fully “own”. Although all debt or gearing can be looked at as leverage, this is a pure example of it in action.

Why Are Online Lenders Beginning to be Preferred Over Banks?

The success of these equipment financing lenders is not a result of the beauty of its mutually beneficial form. It’s actually more generic than that. Not only are equipment finance loans becoming more popular, but invoice factoring, short-term loans, or basically any alternative loan that isn’t from a bank.  This transition to online lenders is more the fault of the banks than any special kind of offer online lenders are making. In an age where peer-to-peer loans are possible and you can turn your spare room into a revenue-generating hotel room at the click of a button, it’s no surprise that banks are being shunned.  The process of getting a loan from a bank now seems primitive. You have physical meetings, are required to fill in endless forms, create extensive business plans, and a human (or a team of them) decides whether you’re worthy of the loan over the span of a month or more. After this deciding period, if you’re approved, you have another long wait until you receive the funds. At this point it wouldn’t be surprising if your approval was delivered to you by a pigeon. If you compare this to an online lender you will find that you will have to simply fill in a 5-minute application, and attach a document or two to find out within five minutes if you’re approved, and you receive the money within 24 hours. The risk-assessment process is automated, your funds are received digitally, and the whole process is more efficient to better meet the needs of small businesses. It’s fair that banks want to have meetings and see business plans before they lend money to companies for long-term, huge growth projects because they are more complicated and require deeper analysis. But what about small businesses needing a quick buck to fulfil an order? Or to replace their broken restaurant oven? When there’s a pressing demand, small businesses need fast solutions. Online lenders have met this need to a surprising degree. Receiving the approval and funds so quickly means that cash flow problems are less damaging, and you’re able to function almost normally. Online lending has proved to be far more efficient than the long waiting periods that come with bank loans, which allows companies to continue their normal activities with their new equipment while paying back the loan.

Pros and Cons of Online Lenders

Advantages

  • Time — Online lending takes a matter of minutes to apply, and hours before receiving the money. There is no faster way to raise funds.
  • Customer Service — Customer service is almost always better with online lenders. The telephone lines are usually open 24/7 as opposed to a bank, which is usually open only during business hours. Not to mention that online lenders are more vulnerable to online reviews — they rely on it more than banks — so there’s more pressure on them to impress.
  • Approval — You have a much higher chance of being approved for an online business loan than you are with a bank. The flexibility and thirst for meeting business’ needs means that they allow short-term loans for businesses with less-than-perfect credit scores.
  • Credit score — When applying for a bank loan, a rejection may result in damage to your credit score. However, your credit score is not under threat when applying for most online lenders.

Disadvantages

  • Loan amount — If you’re looking for a large loan, perhaps $400,000, then you’re going to have a hard time finding an online lender willing to lend you money. Most online lenders are in the business of small to medium sized loans. Banks on the other hand are the better choice for large loans.
  • Interest rate — Quick application analysis, high acceptance rates, and short-term loans, of course, come at a price. The interest for online loans is almost always greater than bank loans.
  • Less reliable — Getting a loan off HSBC is going to be by-the-book, meaning you know what you’re going to get. Many online lenders haven’t been around for more than a few years, though, so there’s a greater chance of them folding, or letting you down in other ways. Essentially, they’re less credible, reputable, and reliable.

Why Borrowing the Exact Amount is Crucial

Online lenders usually allow you to be very specific in how much you want to borrow. This is extremely important for a couple of reasons. Firstly, interest is a big expense and shouldn’t be underestimated. If you borrow more than you need, you’re essentially throwing money down the drain in greater interest payments. Secondly, with equipment financing you’re looking for the exact amount to fulfill an asset purchase. Taking on more than you need may breach the agreements of the loan, which could spell legal trouble. On top of this, you don’t want to be in a situation where they repossess the asset because you failed to repay the excessive amount that you have borrowed. Failure to repay the loan, could even lead to repossessing other assets, too. In order to stay on top of your cash flow and manage the exact finances of your business, it’s important to be careful to borrow the right amount. Having said this, many online lenders do not punish early repayments. If you do discover that you have a surplus of funds, repaying early (assuming no penalty) should be done immediately.


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by Dirk DeBie // Contributor to Businessing Magazine.

Opinions expressed by contributors are their own.