If you are thinking about financing your 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 first three are questions that a lender will ask to begin the financing process. 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 the various 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 Are Purchasing
There are many reasons to add to your equipment fleet and being able to articulate the reasons can help the lender understand and evaluate your situation. It demonstrates that you’ve given careful consideration to the purchase and understand the business goals you are trying to accomplish.
Are you replacing existing equipment or adding to the fleet? If replacing, why? Are you currently facing increased repair and maintenance charges which might be eliminated with new equipment?
If adding to the existing equipment, why do you need additional equipment? Are you adding new capabilities to your product or services offering? 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 adding to your labor costs?
There are no right or wrong answers to these questions, but your answers provide insight into your business and business philosophy, providing the lender with information on which to build your credit profile and structure a financing product that will best meet your needs.
Understand What You Are Financing
The equipment you are purchasing is a critical aspect of the credit decision-making process. A lender always needs to know as much about the equipment as possible, as that is the collateral on which the loan is based. Additionally, the specifications of the machine, including make and model, and if used, the hours or miles, help determine the value of the equipment. 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.
Can the machine be used for multiple purposes or jobs, or is it a single-application machine?
What are the specifications of the machine? Does it include add-ons or accessories? Extended warranties? Other soft costs?
Is the equipment you are purchasing 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 specification of machine. Knowing the market and pricing for the for the equipment you are purchasing 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 Are 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. Some, like CCG, focus solely on equipment financing. CCG has experts that specialize in your particular industry whether it be construction, transportation, waste or manufacturing. 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 are 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 to the questions above will help you decide which lender might be the right equipment finance partner. Additionally, you need to determine if you want a lending relationship that is purely transactional in nature, or if you are looking for a long-term financial relationship. The lender that is most aligned with your company goals and needs will most likely be the best fit.
Additional Considerations and Helpful Hints
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 borrower, as 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.
Many companies don’t consider the method of paying for the 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 on the equipment could help in negotiations or at least, help speed up the process. Especially if you are purchasing 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 you 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 and both parties need to be comfortable and benefit from the relationship. Hopefully you will be in business for a long time and your lender should help make that happen.
Want to ask us these questions to assess our fit for you? Get in touch now.
*A version of this blog post was written by Julie Murphy and originally appeared in Fabricating and Metalworking Magazine in November 2020.