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Whether small, large, or online, every business will reach the point in its journey where a piece of equipment will need to be upgraded, repaired, or replaced. In order to conserve spending and spread out the cost of the equipment over time, many companies choose to apply for equipment loans. If you are a business owner and want to maintain a consistent cash flow, you may want to see if you qualify for this great opportunity. Equipment loans have built-in collateral which makes it easier for you to get approved and also boosts your company’s net value. If the piece of equipment you are looking into will help advance your business, an equipment loan will also help increase your company’s revenue in the long run. Find out in this post about the different equipment loan terms which will help prepare you to make this financial decision.
Loan Length
When it comes to applying for a loan, one of the first things any business owner should research is how long it will take to pay it off. Thankfully with an equipment loan, many financing companies can offer competitive rates and help you to get funded at an accelerated pace. This will help encourage you to pay back the loan as quickly as under a year’s time. Keep in mind, repayment periods also depend on the amount you are borrowing as well as the life expectancy of the equipment which will define the length of the loan. Just like any other loan, make sure you pay at the very least the minimum on time in order to enhance your company’s credit score. Most banks are very flexible with the small business finance options and will help find a term that works best for you and your financial needs.
Interest Rates
For most business owners, percentages for interest rates can be very concerning. With equipment loans, these rates can have a fixed range between 6-9%. However, the better credit score that you maintain, and greater down payments you make on the loan, will help bring down the interest rate. Borrowers who have lower credit scores and put down less money will see a higher interest rate. Amazingly enough, the difference of a percentage point of 1% in the interest could help save your company as much as thousands of dollars throughout the loan repayment term. Obviously, this makes a significant difference when it comes to paying off your equipment loan. This is the reason why most companies focus on interest rates above anything else.
Down Payments
Down payments cover a meaningful percentage of the total purchase price. Most equipment loan providers will require at least a 5% down payment, but others can ask for up to 20% and will provide the rest. However, there are some lenders out there who will finance the entire cost of the equipment but the total of the loan will be higher. If for some reason you are unable to meet the correct down payment percentage, you will not be approved for the equipment loan. It is very important to make sure that you are eligible before applying. Despite how high the down payment percentages can be, many businesses still prefer equipment loans over paying total costs up front for budgeting reasons.
Taxes
Equipment loan tax is definitely one of the most important terms to observe. Thanks to section 179 of the federal tax code, you are eligible to claim the total cost of your equipment within the same year that you purchase it. The reason behind this? Equipment loans can be classified as operating costs for the business and can now be considered a write-off. This has made a huge impact for many companies, especially for the smaller business owners. Be mindful though, there are caps to the total amount written off even if you are using the correct depreciation formula. As of 2018, that amount is now at $1,000,000. Be sure to visit an accounting professional to find out more about taxes for an equipment loan.
Penalties
Just like anything else in life, there are penalties to be aware of if you are not careful. You may think paying off the loan earlier than when it should be paid off may be a good thing, but that isn’t always the case. Some lenders are obligated to charge you prepayment penalties. Typically, that charge will amount to a percentage of your loan’s total remaining balance which definitely won’t help your company’s expenses. You will also want to be mindful of any hidden charges or fees when applying for an equipment loan. Always make sure you read the fine print, and if anything is difficult to understand ask for it to be explained.
Sooner or later, every business will have to make a financial decision where a piece of equipment will need to be maintained or purchased while using discretion in spending. This is the reason why they would choose to apply for an equipment loan over paying for the equipment outright. The process may be seamless, but there is a lot of information that needs to be considered before fully committing to this major decision. Without the proper research, you may find yourself making incorrect decisions on restaurant equipment, construction equipment or other essential components. It is important to educate yourself with the terms detailed above. The business owner who fully understands these terms will have a significantly more successful financial outcome.
