Finance New Equipment the Right Way

DECORATING DIVERSIFICATION

Finance New Equipment the Right Way

February 05, 2010
By Jeffrey Mansfield, Contributing Writer

If you want to invest in new equipment, what’s the best method to finance your purchase: cash, a lease or a bank loan? There are several things to consider when making your next equipment purchase.

First, cash is considered by many to be the most convenient and cost effective means for purchasing equipment. However, cost and convenience are lost if a business must delay an equipment purchase due to a lack of liquidity. Lost profits relating to a delay in acquiring additional equipment should be considered when evaluating a cash purchase. Lastly, a cash purchase also may inhibit your ability to purchase future supplies and/or equipment.

For businesses with long-standing banking relationships, loans may be the most cost-effective form of financing. However, banks often are slow to act, resulting in a delayed equipment purchase. Banks, often with no affiliation to the equipment seller, typically offer little communication, which makes it difficult for you to get an update on the status of a potential approval. Also, a bank’s stringent underwriting criteria can make it difficult for smaller, growing companies to obtain financing.

Finally, leasing allows you the opportunity to maintain cash reserves while offering a cost-effective, convenient and flexible financing option. With leasing, you typically can be approved within 24 hours by completing a one-page lease application. In addition, leasing companies often are more vendor-focused, resulting in better communication. Unlike cash purchases, leasing allows you to acquire the equipment you want sooner.

Mistakes to Avoid
Investigate all your options: Many business owners make the mistake of thinking the bank with which they have their checking account is the only option for equipment financing. In reality, equipment financing can come from several sources, including banks, finance companies, credit unions and captive financing (equipment dealer or manufacturer). If your business is serious about acquiring new equipment, research all your options. By exploring the various financing possibilities available, your business can secure financing terms, conditions and costs that better meet its needs.

Know your lender: Remember, you are entering into a long-term relationship when you finance equipment. If you are not familiar with a potential lender, ask for references. Ask your equipment vendor who they recommend for financing. Find out if your lender is self-funded or a broker. Direct lenders typically retain the servicing of your loan or lease. Brokers simply act as a middle man in placing your deal with a larger lender. Most importantly, make sure you know whom to call with future questions, comments and concerns. Tip: Check out your lender’s Better-Business-Bureau rating (bbb.org/us) prior to entering any new borrowing relationship.

Have realistic expectations: The cost of your financing should be directly rated to your overall credit quality. The lower your credit risk, the lower your financing cost. Applicants with a poor quality credit history often do not qualify for the lowest cost financing. Prior to applying for financing, you should access your credit report and familiarize yourself with your personal credit scores. Understanding whether your credit is strong, mediocre or weak will allow you to set reasonable expectations. If there are any errors in your credit report, you should try to correct them before seeking financing. Also, by knowing your FICO (your credit score, as determined by the Fair Isaac Corp.), you will know what the lender will be looking at, so that he or she cannot tell you your number is lower than it actually is.

Don’t have “rate” tunnel vision: Your monthly payment is only part of the overall financing equation. There are many additional factors that will influence the quality of your financing including, all-in initial cash requirement, term, end-of-term obligation, pre-payment penalty, equipment upgrade options, potential fees etc.

Balance cost and cash flow: Most equipment buyers don’t want to pay too much, but they also want a low monthly payment. If you select a term that is too short, you save money, but at a great sacrifice to your cash flow. If you select a term that is too long, your cash flow benefits because of a low monthly payment, but you may pay too much. The key is to find the proper balance that satisfies your businesses cost and cash-flow requirements.

Get it in writing: Don’t cut corners by choosing a lender based on a “verbal” quotation only. Require your potential lender to provide you with a written financing proposal that, at minimum, provides you with your all-in initial cash requirement, monthly payment, term and end-of-term obligation. Also require your lender to clarify who will be servicing (sending you monthly invoices) your loan or lease.

Determine what you can comfortably afford: Unlike a home mortgage, in which people look long and hard at what they will be able to pay over the next 10 to 30 years, equipment buyers do not always make the same consideration. “It is only for five years” is a familiar excuse for not evaluating the impact of such payments on your budget. Before buying equipment, consider how much money you can put down, and what type of cash flow you anticipate generating from the equipment you are acquiring.

Jeffrey Mansfield is a senior financing consultant with Beacon Funding. He has more than 10 years’ experience in the financial services industry with expertise in tax-saving financial packages. For more information or to comment on this article, email Jeffrey at jmansfield@beaconfunding.com.

Learn more by attending Jeffrey’s seminar, “Financing Tips for the Decorated Apparel Business Owner,” at the upcoming Orlando and Atlantic City Imprinted Sportswear Shows. Individual seminars are just $25 each if you preregister: issshows.com.

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