By Richard Parker
This post is sponsored by SBLA, a website providing the most comprehensive info about small business loans in Australia.
It’s a fact that loans are getting harder to obtain these days, and this situation hits the small business hard. Issues with obtaining equipment financing is a particularly big problem that prevents many companies from growing or even starting. Business owners of today often have no choice but to use alternative financing options with high interest rates. However, these risks might be worth it because without providing more competitive products, companies might not be able to survive.
What Is Equipment Financing and When Do You Need It?
Simply put, equipment financing is the financing your company uses to purchase equipment. According to the term’s definition on BusinessDictionary, the methods of equipment financing include government loans and different types of leasing. However, today businesses have to extend this list because these options are insufficient.
Businesses of any size may require equipment financing not only when the company forms and builds its initial setup but also when you need an equipment upgrade. The latter is necessary in the following situations:
- Your business needs to expand in order to meet the increasing demand or not miss some important opportunity.
- Your company needs to improve its products or services to make them more competitive so you can stay in business.
- You’ve reached the point when the business must evolve to a new level (your revenue has been consistently high and it shows the potential of growing).
- Your current equipment broke down or got damaged and you need to replace it fast to minimize losses.
As you can see, speed is extremely important in many cases when businesses need equipment financing, because without it they might suffer severe losses and miss important opportunities. As a result, the chances of the business surviving are rather small.
One also shouldn’t forget that even if you aren’t in a rush, securing some kind of loan might be the only way for your company to get any equipment at all. The majority of small businesses in the industries that require heavy machinery and various sophisticated equipment have a rather limited cash flow. Therefore, saving up for the extremely expensive machines isn’t an option by default.
Equipment Financing for Small Business: Challenges and Solutions
The first places that the majority of businesses turn to are banks and governmental financing programs. Sadly, these are often the last stops for those business owners because securing a loan from these sources is extremely difficult.
Business financing programs are limited and have rather high eligibility requirements. Therefore, they are impossible for the majority of businesses to obtain. Also, this type of financing usually takes a while to go through. So, if you need to buy equipment fast, you might not benefit from these loans even if you are eligible.
Banks and big credit unions are very reluctant to work with small business owners because financing them is extremely high-risk. As these institutions strive to minimize risks, they require collateral. And a small business usually has very little to offer for it.
But these two options are not the only types of financing available today, which gives business owners new opportunities. The ever-increasing number of them choose to use credit cards and other types of “instant” equipment financing. These options are not marketed as “equipment financing” but they can be used for any purpose you need. This means that you actually get more flexibility as you aren’t restricted by the type of items you can purchase with the money you get. This gives you a chance to make several improvements to your business to achieve better results faster.
The issue with these financing options is that they are all designed for short-term loans. This means that they have high interest rates, which is the reason why many business owners ignore these options by default.
However, the real question here should be whether you can afford not to pay more for the equipment you need right now. If not investing in the equipment and some other important upgrades or replacements will lose you current clients or an opportunity to move up to the next level in your niche, how much money will you lose? Will your business be able to survive at all?
According to Fundera, only half of small businesses make it past their fifth year and about 30% survive past the tenth. Improving your business through investing in better equipment might be the deciding factor that determines if your company will be within these 30%.
Is High-Interest Equipment Financing Worth It?
Of course, taking out a high-interest short-term loan for something that won’t pay off within a couple of months is a huge risk. Therefore, you need to consider the matter carefully and do some calculations before making the decision.
Answering the following questions should help you make the right choice:
- What types of financing are you eligible for?
- How fast do you need the equipment?
- What will be your losses if you don’t have the equipment at the right time?
- How much will you pay in interest for every type of loan available to you?
- When will you be able to pay off the loan considering your projected revenue?
- Can you refinance the high-interest loan in the future or obtain a more favorable one to pay off this debt?
Deciding whether high-interest loans are worth it to use for equipment financing depends on risk assessments. What is the bigger risk for you, not getting the equipment or getting high interest rates? There can be no doubt that you will lose a significant amount of money, but if your company’s survival and growth is at stake, taking that risky step might be the only solution.
Also, you shouldn’t forget that this type of financing means that you will be the owner of the equipment. Therefore, should something happen, you will be able to sell it in order to settle some of the debts.
All in all, there is no easy answer for a business owner who is looking for equipment financing. You have many options today, but in reality, the best of them might be out of reach. Therefore, you will need to consider your needs and abilities so you can make a wise decision about obtaining a less favorable type of loan to use as an immediate solution.