As a small business owner, you look for ways to increase revenue, manage expenses, and improve profitability. One strategy that supports all these points is purchasing or leasing used equipment. This can help you improve production and service while lowering how much you need to pay using cash or credit. Still, many small business owners think that used equipment financing is a difficult kind of business loan to secure, so they don’t explore it.
Here, you’ll learn about the benefits of purchasing or leasing used equipment, how to determine if it’s right for you, and how to find affordable used equipment financing.
What is used equipment financing?
Simply put, used equipment financing is business debt that’s used to purchase a piece of used equipment. Many small business owners use financing to purchase brand-new equipment that has the longest possible useful life, and there’s certainly a time and place for new equipment.
But when you’re on a tight budget and need a vital piece of equipment to move forward, used equipment can be a great and affordable option.
Let’s look at an example: you’re a café owner who’s navigating the challenges of our post-pandemic world. To stay competitive and keep up with demand, you find that you need upgraded coffee equipment, but you don’t have enough cash to purchase the newest models or make a monthly debt payment for them.
This is a great case for used equipment financing that will give you a more affordable monthly payment while securing the equipment your business needs.
When you’re evaluating your equipment options, decide whether you want to purchase or lease the equipment. This will give you a better idea of your financing options to start researching the best lender for your needs.
Key benefits of purchasing or leasing used equipment
Although used equipment may not be the right fit for all situations, for most businesses, it can be a great complement to new equipment.
For example, although some equipment is worth getting new for safety or maintenance reasons, you may find suitable used equipment for other needs. Look for used equipment that’s been refurbished and warrantied by manufacturers and dealers. In these cases, you may be able to score excellent equipment for far less than purchasing new. Here are some of the key benefits:
1. Cost savings
Saving money is the primary reason that many small businesses use this strategy. This is especially true if you have limited startup funding, or if you’re in the early stages of growth, but it’s also a good strategy if you’re established and need an equipment upgrade. The key is to determine how it fits into your overall business plan. Keep in mind that many financing options can be applied to both used and new equipment.
2. Reduced investment risk
When you invest in used equipment, the lower overall costs mean that your payments will be easier to make each month, which reduces financial stress. It also means that you can try adding new product lines or services while minimizing your financial risks.
3. Slower depreciation
Buying new equipment is similar to buying a new car – its book value will go down fastest in the first several years that you own it. Likewise, when you buy used equipment, it will depreciate more slowly, since the initial years of quicker depreciation have passed. This can provide financial benefits for the short term and long term. Talk to your accountant about how your specific used equipment will impact financials.
4. Flexible financing
When you purchase or lease used equipment, you have flexibility in equipment financing options and terms. You can look into dealer financing, a bank loan, an SBA loan or other alternative-lending loan, or financing through a credit card or line of credit. Once you know your options, compare the interest rates and repayment terms and select the financing that works best for you.
5. Quicker acquisition
If you need equipment quickly, then buying or leasing used equipment that’s readily available is a huge advantage. New equipment, on the other hand, may need to be specially ordered, which can result in operational or production delays.
Used equipment financing: Find responsible lenders and creditors
Financing used equipment isn’t difficult, but you’ll need to do some due diligence to find a loan with a competitive interest rate and terms that makes it easier to repay. Of course, you also need to find a lender who will approve financing for used equipment. In addition, if your loan is secured debt that requires collateral, you’ll also want to ensure that the equipment you purchase or lease is valuable enough to meet the requirements.
Here are the steps you should take before you apply for used equipment financing:
1. Review your credit history
Most lenders review personal credit history to determine your creditworthiness. The better your credit history, the more likely you’ll be approved for the financing you need with favorable terms. However, even entrepreneurs with less-than-ideal personal credit scores can qualify for loans with good terms, so be sure to check all of your options. Small business development organizations, like SCORE and Small Business Development Centers (SBDCs), can help. The SBA Lender Match tool is also a great way to find reputable small business financing.
2. Update your business’s financials
As part of the application process, you’ll be asked to provide some key financial documents for your business. These may include, but aren’t limited to, your tax filings, a profit-and-loss statement, a balance sheet, and cash-flow projections. Have those ready and updated before you begin applying for used equipment financing.
3. Confirm the age and condition of the equipment
Make note of the age and condition of the equipment – these are important factors for financing. That’s because for the IRS, accounting, and financing purposes, equipment has a “useful life.” If the equipment you want to purchase it at or near the end of its useful life, it will be harder to finance.
4. Down-payment requirements
Depending on the lender and type of financing you pursue, there may be a down-payment requirement. For example, several SBA loans for equipment financing require a down payment – typically, about 10% of the project total. This includes SBA 7(a) loans and SBA 504 loans, which can finance equipment purchases.
5. Collateral and personal guarantees
As with buying or leasing a car – in which case, the car serves as the collateral for your loan – when you purchase or lease used equipment, the equipment itself can usually serve as the collateral. However, there may be cases in which the equipment doesn’t have enough value to secure the loan. In these cases, you may be required to personally guarantee the loan.
Why are used equipment appraisals so important?
A step in the financing process that can catch business owners off-guard is the equipment appraisal. Here’s what you can expect from the used equipment appraisal process.
Establishing fair market value: Equipment appraisals determine current fair market value for financing and collateral value purposes. This varies tremendously for used equipment based on age, condition, and other variables. If you’re financing through a dealer, you likely won’t need this step, but most other lenders require a professional appraisal.
Impact on financing terms: Your credit history is akey factor in your financing terms, and so is the value of the equipment. This factor is determined by the appraisal. A fair appraisal can help you secure better terms. It can also reveal that the equipment may be overpriced in relation to your deal. In either case, you’ll be better off from the appraisal process.
Choosing a reputable appraiser: Lenders often have information on reputable appraisers and can make a referral for you. Whether you use someone recommended by the lender or find your own, be sure to:
- Confirm relevant certifications and licensing to meet industry standards
- Check for related/relevant experience with similar equipment or within your industry
- Contact references and previous clients to learn about their experience working with the appraiser
- Confirm the timeframe for your appraisal as your loan may have specific deadlines
Paying for the appraisal: When you contact appraisers, be sure to get a quote for the cost. The cost of the appraisal is typically you responsibility as the borrower but, depending on the lender, you may be able to count the appraisal cost toward any down-payment requirement or roll it into the overall loan.
Used equipment financing: Pursuit can help
Financing used equipment doesn’t have to be difficult or stressful – it’s simply a matter of finding the right lender with the right loan for you, completing an appraisal, closing on the loan, and purchasing or leasing the equipment that can help your business thrive.
At Pursuit, we offer more than 15 loans and a line of credit tailored to meet the needs of all kinds of small businesses, including used equipment purchases and leases. Take a look, then contact us to learn more about how we can help.
