Posted By: Southern Fabricating Machinery Sales | Posted On: May 5, 2020
What You Need To Know About Equipment Financing
In machine tool sales we are often asked about equipment financing. “What are your rates?” Or “What kind of terms do you offer?” and “How much down do I need?” Are all common and valid questions. While each individual scenario and need is different, the one thing in common is equipment financing can save you money over the long haul, reduce your exposure to your bank and other financial institutions and provide security for you and your company.
Types of Heavy Equipment Financing
Loan: A loan is a traditional machine tool financing option that is based on a term length and a fixed interest rate. This option presents both an asset and liability on your books. Typical loan terms are anywhere from 36 months to 84 months and includes a simple "buyout" at term end. (typically the buyout is $100).
Lease: Leasing programs, although available, are rarely used these days as most buyers are looking to secure equipment over the long term. Leases allow for a smaller payment over a fixed term whereas the equipment is returned to the finance company at the end of the lease term or re-leased, purchased outright or converted into a fixed rate loan.
Equipment Loans and Financing Rates
In equipment financing one of the very first questions a buyer may have is “What are the rates?” Financing rates on equipment financing change on almost a daily basis. They are based on several economic factors but rely most importantly on the individual or companies requesting the financing. Rates with equipment financing are always a fixed rate (unlike available home loans) and do not vary after the loan is made. Providing a loan rate over the phone is much like your customer describing a part to manufacture and asking you 'how much?'. You may get close, or you may be wildly off, but either way quoting a rate, just like your part guesstimate can only be provided after all the factors are known.
The Benefits of Industrial Equipment Financing
Diversification of debt is a predominant factor in financing. Making sure that you have your liabilities spread between different vendors is a key way to protect your overall asset, your company as a whole. While banks jockey for your business promising the best rates, longest terms etc, they also don’t want you to diversify as your debt equals their profits. However as you get more in debt with one lender that lender has more control over your company and capabilities. In years past we have seen banks call notes immediately due, exercising draconian clauses in loan agreements that heavily weighed in their favor when the economy soured (ref: 2008 Housing Crises).
Keeping debt/credit separated is a long established practice the minimizes your personal and corporate risk over a variety of lenders. Having multiple lenders in your portfolio allows your company to access any of them to meet a specific need or purpose that they are specifically well suited for. Some lenders may be great at office equipment, vehicles etc., while others specialize in buildings and land purchases. Finally there are those, the specialize with just machine tool purchases for manufacturer's, they know the terms, the values, the needs and the accessories. It is these lenders that can best help you acquire, refinance and maintain your equipment debt.
Let's take a look at the typical funding resources for equipment purchases and evaluate the good/bad of each.
- Cash Purchases: When purchasing a machine tool with cash you do so to avoid any kind of debt whatsoever and although you may now own the asset you have eliminated a strategic liability that may be necessary to ward off higher taxation over the years. Also using your cash eliminates that necessary source for emergencies where there is no funding available or not immediately available. You’re definitely best served keeping your cash at the ready for what cannot be financed.
- Bank Lines of Credit: Lines of Credit are great resources for any business. Allowing quick access to funds for equipment and material purchases is what they are designed for, however they come with a blanket lien protection for the bank. Simply put the bank liens everything in your corporate possession (and often your personal possession if a ;personal guarantee is required). These blanket liens place the bank first in line for any debts and often can lower your credibility to other, more suited lenders. Just like cash, keep your line of credit for what can’t be financed quickly and easily.
- Bank Loans: Bank loans can be an attractive option for financing machinery and equipment purchases due to a lower interest rate, however they often come with blanket equipment and property liens as well as personal guarantees. Further the bank loan increases your company's risk to that financial institution lowering your borrowing ability for other things like building loans and/or increased lines of credit.
Choosing the Right Equipment Financing Option
As each individual scenario is slightly different there is not one total solution for all. What is known across the board is that equipment financing is available to help you grow your business while safeguarding your cash, lines of credit and assets. In a past article entitled the Top 4 Reasons to Finance Your Next Manufacturing Equipment Purchase we discussed in further detail about why equipment financing is preferable over cash purchases. Also in another article entitled the Top 5 Useful Tips for Used Equipment Financing we discussed some other factors to consider when looking at equipment financing that can help you make the right choice on loan vs. a lease and what lease or loan term lengths you may want to pursue.
At Southern Fabricating Machinery Sales, Inc. our staff are experienced in working with finance companies, banks and other lenders to help you get the most machine for the money. Our lenders simple one page credit app makes the process simple and does so without any hidden fees or surprises. Call us today at 1-813-444-4555 or visit us on the web at www.southernfabsales.com for more info.