Let’s face it. If your business requires equipment, odds are it’s expensive. Deciding to replace, upgrade or add new equipment is a big decision that could affect profits and cash flow. In this blog, we’ve identified a few key decisions business owners should keep in mind when considering major equipment purchases and financial options that may be available to you, as a business owner.
Know the value and benefit the equipment provides your company.
Be honest – is this equipment purchase a need or a want? If safety is a concern – to personnel, building or company reputation – replace or upgrade as soon as possible. Is the current equipment cost effective to maintain? Machinery that is always breaking down or expensive and difficult to maintain might yield lower operating costs if it were replaced. If you’re considering new equipment, make sure it will increase production capacity, lower costs and improve operating efficiency. Ultimately, adding or replacing equipment must meet or exceed your clients’ current and anticipated demand and quality expectations. If you can’t prove that, your profits could suffer.
Consider a variety of financing options to purchase equipment.
If your company has excess cash available, paying for equipment is fast and easy, with no added interest expense. Before you commit cash, consider the impact to the company’s working capital. By using cash, would this negatively affect cash flow and make it difficult to meet ongoing business expenses, or limit the company’s ability to grow sales? If so, or excess cash isn’t readily available, consider the following financing alternatives.
Equipment manufacturers often offer low- or no-interest rate financing options, sometimes referred to as Captive Finance, since the manufacturer captures both the equipment sale and the associated profit margin. Always ask if discounts are available if paying with cash or financing from another source.
Leasing equipment can be a good option if cash flow is a concern. Leasing offers less out-of-pocket cost because equipment providers rarely require a down payment. Leasing may also tax deductible (be sure to first consult your tax advisor). One caution about a lease – depending on the terms, it can result in a higher net cost to the company over the life of the lease. As with other financing options, make sure the terms of the lease don’t exceed the expected life of the equipment.
Traditional commercial bank financing is another option, especially if the manufacturer offers discounts on cash or other financing. Bank loans usually require a down payment – typically 20% for new and up to 30% for used equipment – so again, consider your cash flow needs. Commercial banks will complete more due diligence on the company’s financial position, both historically and projected. Through this process of analyzing debt, projected profit and cash flow, payments can be structured to match your company’s business cash flow cycle.
Regardless of which financing option you choose, shop around to make sure you’re getting best quality and price on your equipment purchase. In some cases, used equipment may offer a quality solution at a better price.
New or used, purchasing equipment is not an easy decision for any business owner. It’s expensive, often requires time and training to install and operate, and may or may not meet expected goals. If you decide to upgrade your equipment and require financing, it is critical to ensure the term/amortization of the loan or lease does not exceed the useful life of the equipment. You don’t want to make payments on equipment that is no longer working.
Learn more about our equipment and term loans and connect with a Banner Bank Commercial Relationship Manager near you.