Which is the Right Choice for Construction Equipment: Leasing or Financing?January 13, 2023
Construction Equipment Financing: The Basics You Need to KnowMarch 13, 2023
Through financing, businesses will be able to loan or lease-to-buy construction equipment easier than ever before. Owning the equipment without outright purchasing is a convenient method for several reasons – the biggest being the collateral is the equipment for the loan.
Even when businesses have the ability to afford the construction equipment they need, it is often better to lease equipment over buying it. This improves cash flow for other parts of the business. And that cash flow and other benefits can be leveraged when businesses consider the following tips for financing heavy equipment:
#1. Loan For The Equipment
Taking out a loan for the equipment automatically makes the owner of the purchase. But what business owners often forget is that the equipment can be used for equity after the loan is paid up. This is crucial, especially when a business needs to buy additional equipment.
Alternatively, businesses can explore a lease back agreement. This is where the loan company can buy the equipment back after the lease is over.
Obtaining an equipment loan is easier than a small business loan due to regulations. Heavy equipment takes professional training to operate so it’s easy to show training certificates over potential business skills.
Another consideration is that the equipment loan could be used as a tax write-off.
Loans are also easier to get for businesses that have multiple assets. There will always be a down payment for each equipment loan; however, the amount will decrease for businesses that have multiple assets. It’s easier to offer additional assets as collateral in those situations than to pay more upfront cash.
#2. Lease The Equipment
Going down the route of leasing will result in significant savings. Companies can enjoy the most up-to-date equipment. Furthermore, since the equipment is leased, there are no additional interest payments attached to it. Companies can even bypass putting a down payment on the equipment too.
There are several flexible benefits that come from leasing such as negotiating the terms of the lease. There are options where businesses can keep the equipment after the lease is over. In those cases, the price is discounted significantly.
#3. Keep The Price In Mind
When obtaining financing for heavy equipment, there are other considerations that are factored in. These factors stretch beyond business credit score and current earnings. One of the most significant ones is the price of the equipment.
Another factor is the size of the down payment. A business with no or little credit score or poor cash flow could make a case for a loan. Especially if they offer a larger down payment.
#4. Remember Interest Rates
The interest rate is set depending on the credit score of a business, how long the company has been around, and the type of equipment. As mentioned above, it will also hinge on the size of the down payment and how expensive the equipment is.
This is important to note because businesses can still find themselves paying high interest rates for a piece of equipment that is on the low-end in terms of pricing. On the flip side, companies could also enjoy lower interest rates on equipment at higher price points.
Generally speaking, interest rates will fluctuate between 8% to as high as 30%.
#5. Ensure Term Lengths Match Expected Life
The last thing a business wants is to pay for a loan on an equipment that is no longer in use. Business owners should check the term lengths and determine whether they’re reasonable.
A good reference point is if the equipment lifespan has 50,000 hours before repairs are needed, businesses owners should ensure the loan terms be four years or less.
Most loan terms will not exceed the life of the equipment; however, the equipment can break down faster if a business plans to use it heavily on a daily basis.
#6. Timing Is Everything
Equipment loan underwriting processes are not as rigid as unsecured loans are. Often, businesses can get their loans approved in a few business days. Dealing with online lenders tends to be a faster option than going through a bank.
The speed of obtaining a loan can be sped up in many cases. For example, the approval process can be quickened if the business can offer the lender the vendor’s invoice for the equipment the business wishes to buy.
Get started leasing or financing the equipment you need. Contact Yellowhead Equipment Finance today to get started. We will help you identify your eligibility, work with you to understand your options, and work with appropriate lenders to get the best solutions for your financing needs.