This is part 2 of a 2-part article series in which we discuss the pros and cons of different payment options available to business owners when they are acquiring equipment for their businesses. Whether you own a restaurant, an automotive repair shop, a legal firm or an exercise facility, the one commonality is the need to purchase quality equipment at an affordable price. Once you have invested significant time into assessing potential suppliers and equipment options, you will often find that a critical part of the procurement strategy is overlooked. This part can be summed up in one basic sentence.
Taking the time to assess your various purchase options can be one of the most critical steps in the process. In the previous article we covered personal cash, cash capital, and company financing. Of course, every payment method comes with its own set of pros and cons, and different situations will call for different measures. What might be best for one company might not be a good option for another. What drives this “best” purchasing strategy is dependent upon a wide variety of factors:
- The maturity of the business (years in operation)
- The cash flow position of the company
- Company credit strength and history
- The corporate structure
- Type of equipment being purchased
- Bank covenants
With this in mind, it is important to take a good look at all of your options before moving forward. So now, continuing from our last article, let’s get started with option #4.
Credit cards come with their own pros and cons. In a lot of ways, they are very similar to company financing. Credit cards can be a quick and easy solution to start-up costs, and can also serve as an interim funding option for companies that are waiting for a cash infusion of some kind. Of course, it is important to remember that all credit card companies have different interest rates, so you should make it a point to know exactly what you are going to be getting yourself into should you choose to use credit to fund your business equipment acquisitions. What will your monthly payments be? What kind of interest will you need to pay every month? How long will it take you to pay everything off?
Credit cards also require you to have at a clean credit history and it can be extremely difficult for start-up companies to qualify, especially if the principals of the business have little or no credit profiles.
- Can provide an easy way to pay for your equipment
- Can be a great way to float your initial expenses before paying them down in cash
- Can provide you a means for paying for your equipment when you might not have any other choice
- The interest can be brutal if you don’t get things paid off quickly
- Relying too much on credit cards may leave you with very high monthly payments, which could stress your budget later on
- Some people may not have enough credit to get everything that they need, rendering this option a bit useless
This might be one of the most common methods by which people outfit their businesses. In today’s economy, obtaining a small business loan can be challenging. If your business qualifies, this type of loan can be very reasonable in terms of monthly payments and interest. Of course, getting a small (or large) business loan will involve going to the bank and filling out a loan application. You may be required to submit a business plan, as well as various other pieces of financial information. The equipment may be used as collateral for all or part of the loan approval terms and conditions. The process can be a bit labor intensive, though well worth the effort if you are in need of funding and if your company can meet the bank’s loan criteria.
All in all, there is a good reason for why this option tends to be one of the most popular. Bank loans are pretty straightforward, fair, and designed to be useful for everyone. If your business has significant financial strength and currently has a long standing bank relationship, this can be a very viable strategy to pursue.
- Bank loans are pretty safe and straightforward
- Shopping around at different banks offers you the opportunity to find the best rates and terms
- They may offer lower rates on interest than many other financing options
- The application process can be lengthy and a bit complicated
- The approval-to-funding time can be extremely long
- Preference is more often given to businesses that are already running. Small business start-ups might have a bit more trouble qualifying
- It can be difficult to get banks to loan you the full amount asked for, which could leave you short and force you to seek out additional options
Equipment leasing is becoming more and more popular as businesses look for better ways to obtain the equipment required to stay competitive while preserving their valuable cash at the same time. The great thing about leasing is that it eliminates the need to come up with a large sum of cash to procure the equipment you require. It also makes it possible for you to get the best and newest equipment with basically no down payment. Leasing, unlike a bank loan, is also usually very convenient to get started with.
Often, credit decisions are made within hours instead of days. Equipment financing contracts are typically only one page long—not the usual stacks of documents banks require you to sign. You can also get access to the funds in a much more timely fashion as compared to bank-based financing.
Of course, leasing does have its downsides. With some leasing plans, you won’t actually own the equipment—though this could also be seen as an advantage. When your lease is up, you can trade for newer models or even choose to buy outright.
- The initial costs are lower
- Allows you to more easily budget your equipment purchases
- No collateral required to obtain financing
- Leasing makes it easier to get access to the current models of equipment
- When your lease is up, you can trade-in what you have for newer equipment
- Rates are based on the credit strength of your company—the better the credit history, the lower the rate
- Enables companies with challenging credit histories to obtain capital
- In the long run, leasing is more expensive than buying
- Leasing does come with a contract, just like any bank loan or credit card purchase
In the end, the most important thing to remember is that you should examine every purchasing possibility carefully before committing to any specific option. Choosing how to pay for your business equipment is going to play a big role in determining your company’s success, so always make sure to check and re-check your options before deciding on a specific direction. Whether you buy or lease, always choose the option that is going to make the most financial sense for your business’s current stage of development. Most important of all—take the time to think through your options. Weigh the pros and cons before you buy.