Machines depreciate on a daily basis, but you can never be sure of exactly when a machine will stop working efficiently. But when it happens, things can really go ‘south’ fast!
Imagine a factory that makes shoes. It would need different types of machinery to get the job done, including a cutter to give the shoes their shape and cut the right design. If the cutter stops working or works at a lower rate than it is supposed to, the production will take a hit, and the whole business may come down.
In such a scenario, you will have to quickly find a replacement, but it is not very easy as huge costs are involved even if you opt for a used machine to replace your old one.
This is why a lot of businesses turn to loans. In fact, according to reports, 78% of businesses opt for loans when they need to buy a machinery, especially when it is a big and expensive machine.
According to Unsecuredbusinessloans.com.au, “many businesses seek finance to buy machinery, with the goal of increasing business productivity and grow cash flow. Financing for businesses can be made immediately and not just to buy equipment. It is important to remember, an ‘equipment loan’ can only be used only to purchase approved business-related machinery”.
What is an Equipment Loan?
An equipment loan helps to buy new equipment by using the acquired equipment as collateral. It’s like using the equipment to generate revenue and then using the earned money to pay for the equipment on a monthly basis with interest rate.
Ultimately the amount of money loaned is 100% of the value of the equipment. Interest rates vary between 8% – 30%, depending on the total value of the business machinery.
This type of loan is in high demand because lending approval is simple and money can be made available within 2 days.
Why Take an Equipment Loan?
Equipment loans can be taken for a number of reasons. While the general purpose is to buy equipment, it’s important to understand when these types of loans will be accepted.
A good reason is to replace an old machine that is malfunctioning. Another common reason is for expanding business operations. If you wish to increase production you will need to increase machinery so that people can work on it and produce more output.
This is important to know because when you apply for equipment financing, the financial institution will inquire for the reasoning.
Who Can Qualify for an Equipment Loan?
There are some basic requirements for businesses to get an equipment loan including 600+ credit score (can also get on low scores but with increased interest rates). Other than this, the business must be active and running for a certain period of time with a specific annual revenue.
The figures depend on where you are applying for the loan so it would be wise to do some homework. Moreover, keep all your documents handy as you will be asked to submit a number of documents including your credit history, bank statements, equipment quote etc.
How Long can an Equipment Loan Last?
They do not typically come with a deadline as they can be extended depending on the item’s life expectancy.
Once the entire amount of the loan is paid, the business owns the equipment.
When is Equipment Finance the right solution?
Buying business machinery via a loan will cost you more than the actual RRP in the long run, since you’ll be paying interest. Although it still makes good business sense to take out this type of loan if you are cash strapped and there is an ROI opportunity at stake.
ROI is possible if the purchased equipment can boost production, fulfill a backlog of orders and generate revenue above the cost of prepayments. In the process, you will earn the equipment outright and make a profit.