Why borrow money to purchase equipment?
A new equipment is absolutely necessary to increase profitability and to grow as a business. You have already decided on the type and characteristics of the dream equipment. One question is still in the air: should you pay cash for this equipment, get an equipment loan or lease the equipment?
Let’s examine the three options!
”Cash is king” become a common place for all business owners and managers because any company should be able to cover the short term debt and survive in the present in order to prosper on the long run. Two simple ratios will better tell if your company is liquid enough to afford using cash to purchase equipment: current ratio and quick ratio. The quick ratio or, as it is also known the acid test, is a better indicator of liquidity since it realistically show if the company can manage short term obligations with cash and assets on hand. Values lower than 1.0 for quick ratio is a red flag; as it indicates that current liabilities exceed current assets. You should also wait until enough cash is available to purchase the equipment, meanwhile you might lose revenue and you might have to refuse customers due to lack of productivity.
Knowing all the above why should you block precious, and rather important amounts of cash to purchase equipment that depreciates in time? It is true that you don’t have to worry regarding the monthly payments and you don’t have to go through the loan or lease application process. But the monthly payments and even a difficult application process are nothing in comparison with the impossibility to pay salaries or other similar obligations because you have blocked your money for purchasing equipment and will not give you back lost revenue.
Using a Equipment Loan
There are two options here to purchase equipment: you can use your operating line of credit if you have one (you can also open one if currently don’t use such a financial product) or you can take out a business loan.
The Line of Credit, operates like a credit card, usually offers a low interest, but otherwise has the same disadvantages when used to purchase equipment as cash. If you need money for current expenses you will not be able to extend your credit line if by borrowing an additional amount you will exceed your exposure limit. The bank will request to increase the revenue of your business and/or to pay partially or in full the debt that you currently have. This might not be possible with the money blocked in the purchased equipment.
Traditional Bank Loans will require a lot of paper work, longer approval periods and restrictions imposed by the bank, such as to maintain some financial ratios in certain limits. If such restrictions are violated you might be asked to return the loan in full even the monthly payments were OK. On the other hand the costs of such loans are not very high.
One can also use Non-Bank Equipment Loan. For these loans less paper work is required and the qualification requirements are less restrictive. Approval time can also be shorter. This equipment loan has fixed rates with no balloon or residual payments but you have to come to a down payment that can vary between 10 and 30 percent of the equipment.
If you want to own the equipment at the end of the lease a Capital Lease is the right option. Such a lease is structured as a fixed term, non-cancelable lease with a fixed residual or $1.00 buyout at the end of the term. Take into consideration when deciding on capital lease that equipment might be obsolete at the end of the lease or very soon after.
An Operating Lease proves to be a good option if you need to change the equipment every few years or if you already know it will become obsolete. The benefits of an Operating Lease would be that you would be able to write off the entire monthly payment not just the interest expense as for a loan or when using Capital Lease.
In conclusion, you have different options to consider when you need a new piece of equipment and all have PROs and CONs, analyze them and decide what works for you but look twice if you want to use cash.
Other Useful Resources By Plousio
- What is a business loan?
- Credit Score Explained
- Why borrow money to purchase business equipment?
- Business Loan Underwriting Explained
- Interest Rates & Factor Rates Explained
- Why business loans get declined
- Business bank account requirements for loans
- Preparing for a business loan
- Getting approved for a business loan
- How to qualify for a business line of credit?
How Does Plousio Work?
Plousio makes it easy to find a great small business loan with the most competitive rates. Simply answer a few questions, select a lender and fill out our account creation form and you’ll start receiving new offers right away! With 3 easy steps, you can get your death care business funded!
Step #1: Apply online or call 1-508-848-0534
Step #2: Receive the most competitive offers
Step #3: Get funded within 24 ~ 48 hours
Contact a Plousio Funding Adviser Today
If you need help with determining your funding eligibility or preparing application and documents, please contact our funding adviser today. Plousio funding advisers pride themselves in transparency and non-aggressive communication practices. They are not here to make sales quotas, instead, focus on helping you every step along the way of your funding process. In the unlikely event, you do not think that Plousio is the right solution for you, just let us know – No problem! We promise we wont be calling you 5 times a day like some other companies do.