PROFIT MASTERY COLUMN
BY JULIE MURPHY
If you’re thinking about financing a new or used equipment purchase, we have some tips to help make the process easier and faster. Before you contact a potential lender, think about the following questions.
- Why are you purchasing equipment?
- What equipment are you purchasing?
- How are you paying for the equipment?
- Who is the best lender for your situation?
The lender will begin the financing process by asking the first three questions. Of course, you’ll need to provide a credit application and financial information, but being willing to have a conversation or consultation with the lender will, in the long run, help you best meet the goals and needs of your business.
The last question is one you should ask so you can evaluate financing partner options. Not all lenders are created equal, and you need to find the partner best suited to move your business forward.
Know Why You’re Buying
There are many reasons to expand your equipment fleet, and being able to articulate the reasons will help the lender understand and evaluate your situation. It demonstrates you’ve given careful consideration to the purchase and understand the business goals you’re trying to accomplish.
- Are you replacing existing equipment or adding to the fleet? If replacing, why? Are you facing increased repair and maintenance charges that could be eliminated with new equipment?
- If adding equipment, why do you need the machine (or machines)? Will it enhance or improve the capabilities of your product and/or services offerings? Do you have a new contract? Is that contract short-term or long-term? Will you need to hire an operator to run the machine, thereby increasing your labor costs?
There are no right or wrong answers to these questions. However, your answers provide insight into your business and business philosophy the lender needs to build your credit profile and structure a financing product that will best meet your needs.
Understand What You’re Financing
The equipment you’re buying is a critical aspect of the credit decision-making process. A lender needs to know as much about the equipment as possible because it’s the collateral on which the loan is based. The lender will use the value as a starting point to determine the amount of money that can be borrowed to pay for the machine. Information that will help your lender calculate equipment value includes:
- Can the machine be used for multiple purposes or jobs, or is it a single-application machine?
- What are the machine’s specifications (i.e., make and model)? Does it include add-ons or accessories? Extended warranties? Other soft costs?
- Is the equipment new or used? If it’s used equipment, it’s a good idea to have a general idea of market prices for that particular make, model, year and specifications. This information can also help when negotiating purchase price.
There are a number of online equipment marketplaces that can be used to search for and price equipment:
Determine How You’re Paying
Your financial situation, including your current cash and credit positions, will help the lender render a credit decision. You will need to complete a credit application and submit additional documentation so the lender can customize financing to your situation. This typically includes a review of past revenue and profit history, a snapshot of the current debt-to-worth ratio, and assessment of future cash flow to include the impact of the equipment being purchased.
- Do you have cash for a down payment? If not, does the business own assets or equipment that can be refinanced to substitute for the down payment?
- What does your current book of business look like? Do you have future contracts that will help improve your cash flow?
- Are there past or present financial issues that could hamper your ability to get approved? Do you have any tax liens or judgments? Previous bankruptcies?
The best course of action with any financing partner is to be open and honest about your financial situation – good, bad, or ugly. Be sure to disclose any past financial issues or problems and be prepared to discuss how they have been or will be overcome. Your honesty and forthrightness won’t guarantee a credit approval, but could help the right lender structure a transaction and get you approved when banks or other lenders would deny credit.
Find the Best Equipment Finance Company
There are a lot of lenders willing to finance equipment, but not all focus solely on equipment financing. To help assess fit, ask your potential lender the following questions:
- Do they have experience working with clients in your industry?
- Do they know and understand the equipment you’re purchasing? Are they familiar with the brands and can they easily assess equipment values?
- Do they understand the business rationale for the equipment purchase?
- Do they understand the business cycles and seasonality specific to your industry? And are they willing to consider those cycles and seasonality when proposing the loan terms?
The answers will help you decide which lender might be the right equipment finance partner. Additionally, you need to determine if you want a relationship that’s purely transactional or if you’re looking for a long-term financial relationship. The lender that’s most aligned with your company goals and needs will most likely be the best fit.
Additional Considerations and Helpful Hints
Diversification. Consider diversifying your lending and banking relationships. If you have multiple loans, be they real estate, equipment, or other business loans, it’s a good idea to use multiple lenders. This reduces risk for both the lender and the borrower because no single entity holds all the loans, and it allows for asset specialization.
For example, an equipment finance company will be more familiar with equipment loans, whereas a bank will be more familiar with real estate loans.
Diversification also gives you flexibility as your business grows. You’ll have multiple relationships on which to rely for help.
Get pre-approved. Many companies don’t consider the method of paying for new equipment until the purchase deal has been negotiated. Much like a mortgage pre-approval, understanding your potential payments and the total amount you can afford to spend could help in negotiations, or at least help speed up the process. Especially if you’re buying at an auction, where speed is very important, having all your paperwork and documentation at the ready could give you a leg up.
Basically, it comes down to knowing and understanding your business and your equipment needs and being able to convey that to potential lenders. A financing relationship is a two-way street. Both parties need to be comfortable and benefit from the relationship. Hopefully, you’ll be in business for a long time – and your lender should help make that happen.
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