Equipment financing is another powerful tool to help your business grow and succeed. Financing a newer piece of equipment can help you cut costs, avoid delays, and build credit. We sat down with Gerald King, founder of King Commercial Capital, a cash flow solutions brokerage firm that specializes in equipment financing, to learn how equipment financing works, when you should use it, and how to find the right funding source for your needs.
What is Equipment Financing?
Put simply, equipment financing is the use of a loan to purchase a piece of equipment for your business. It is a broad term and can be used for smaller pieces of equipment like a $5,000 stamper and for million-dollar items like bulldozers and cranes.
The terms and details of the loan vary by lender and by the client’s needs, says King. “There are multiple solutions for financing for businesses. It depends on the business. When someone calls and says I need to finance this bulldozer, I talk to them about their needs. Their financing needs. I have to learn from the client what they need to structure the solution properly.”
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When to Use Equipment Financing
Many contractors may shy away from obtaining financing and, preferring to pay for equipment in cash. It’s understandable — paying in cash feels like the responsible thing to do, but is it the best use of your cash reserves?
Probably not. There are plenty of instances when your business might need cash on hand — a project delay might put payroll in jeopardy, for example. King advises clients to utilize available financing solutions and save cash for emergencies. “Don’t spend $100,000 on a new piece of equipment in cash and then have nothing in your coffers. Cash is king. Save it for when you need it.
Equipment Financing and Banks
If you have a line of credit with your local bank, you may consider using that to purchase your new concrete mixer. Hold that thought. A bank line of credit (LOC) is similar to cash — it is a finite resource and is extremely valuable in an emergency. Tapping out your LOC on a five-year loan isn’t the best use of that available capital, and you’ll miss having that LOC option if your business suffers a financial pinch in the future.
Another reason an equipment finance broker is a better option than the bank? Exposure. A bank can (and will) only loan so much money. It’s a matter of risk mitigation. However, finance brokers often have a variety of funding sources, which means they may be able to loan more to one individual client than a bank can.
This can be critically important if your business is growing. King says, “A bank won’t grow with you. They will draw a line in the sand. Equipment finance partners don’t run into that exposure problem. They can grow WITH you.”
Finally, a bank looks at an equipment loan much like an auto loan. If the equipment is several years old, they may not consider it to be valuable enough to warrant the loan amount. Equipment finance partners have far more flexibility. “If it makes you money, saves you money, or makes you more efficient,” says King, “I can usually get it financed.”
When Not to Use Equipment Financing
Most equipment finance loans are taken out for used equipment. That’s because new equipment is often purchased from a distributor or manufacturer, and they offer their own competitive finance options.
Other than new heavy items financed through the manufacturer, equipment financing can be used to purchase a number of items your business needs. King says, “Equipment can be anything from computer software to a crane. Bulldozers, dump trucks, whatever it is you need.” He added with a smile, “Just don’t ask me to finance the vending machine.”
Sorry, snack lovers.
Equipment Financing Documentation
What paperwork you need to submit will depend on your lender, your business, and the equipment you intend to purchase. King says that often a smaller-ticket item can be financed based on an “application only” submission. That means you only have to provide bank statements and an application. Larger items, anything over $100,000, requires a full credit package including a few years’ tax returns, and possibly your personal bank statements and tax returns.
But, King advises sending over as much documentation as you have, regardless of the size of your loan. More documentation helps paint a more complete picture of your business — it tells the story of any hiccups on your credit and how this equipment will help you grow.
“I have to paint a picture to underwriting on why this bulldozer is going to be good for their business,” says King. “I need to be able to explain the hiccups on their credit. More documentation makes it a verifiable story.”
Renting Versus Owning Equipment
Are you currently renting a piece of heavy equipment and think buying would save you money? It might, but it depends on usage. King has a formula to help contractors decide when to pull the trigger on a new purchase. “If you are going to use the equipment 30% of the time for business purposes, definitely buy.”
Maintaining Equipment Versus a New Purchase
Let’s say you have an old forklift that you keep repairing because you don’t think you can afford to buy a newer one. Before your next trip to the mechanic or parts shop, sit down and do the math. How much is this piece of machinery costing you to maintain? If the cost of its maintenance is higher than the cost of a payment on a newer, better, more reliable piece of equipment, then it is time to turn that bad boy in.
“The cost is only going to increase,” King says. “If you spent X this year on maintenance for this equipment, what are you going to spend next year?”
There is another cost to consider if the equipment is critical to your business performance. Work stoppage and delays are cash flow problems, and cash flow problems are like snowballs rolling down a mountain. They grow exponentially if you don’t stop them fast.
“If you can’t use the equipment, how does that impact your schedule?” says King. “And how does that schedule impact affect your cash flow? For example, if you are doing underground boring and your older equipment breaks down, you can’t work. Downtime is a cash flow problem. It makes sense to buy and keep your guys working.”
Choosing an Equipment Finance Partner
Not all equipment partners operate similarly, and there are bad apples in the industry just like anywhere else in lending. King cautions contractors to do their research, ask questions, and read the fine print before signing.
There are three practices some lenders utilize that you want to watch out for, says King. They are:
Evergreen clauses. An evergreen clause means if you don’t terminate your financing, it auto-renews. That could mean you get stuck with way more payments than you originally contracted. For example, if you had a 36 month loan or lease, and you get stuck with an evergreen clause, you might end up paying an additional 30-35% on top of the original asset cost.
Payoff penalties. Some equipment finance lenders will include “prepayment penalty” or “sum of total payments” language, which basically means that if you pay off the loan early you still have to pay the interest and fees associated with those future payments. Ask your prospective lender if there are any pre-payment penalties or fees, and if future interest is included in the payoff amount. Then, read the contract to verify their answer.
Interim payments. Think of this one like a home loan and prepaid interest. Whatever time of the month you close, you still owe interest for the rest of the month until your first payment is due. So, if you close on the 25th, you have 5 or 6 days of interest accrued that you will need to pay. The trouble with interim payments, or “interim rent” as it is often called, is when lenders get creative with dates. For example, if you sign a contract with quarterly payments and they tack on an entire extra month to round out the quarter.
King has simple but smart advice when choosing an equipment finance partner. “If it sounds too good to be true, it probably is.”
King takes his responsibility to his clients seriously, which is why he is part of our preferred referral partner network. King Commercial Capital, much like Mobilization Funding, believes in building relationships and doing what is best for our customers. King puts it like this, “I have a fiduciary responsibility to put my clients into the best possible financial situation for their given scenario.”
Equipment financing is one more weapon in your arsenal for growth. Used wisely, it can help you execute on more jobs more efficiently, build your company’s credit, and keep your cash flow liquid.
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