Why would you pay back financing in a few months for a machine that will earn money for your business for the next seven years? This is the core idea behind equipment financing. Equipment loans are available for sustained payments to cover the cost of an essential business asset, even when MCA funding (sometimes known as a cash advance loan) makes a machine payment seem less burdensome when the business runs out of cash and a critical machine breaks down. It is good practice to consider asset life and the time it takes to generate profit, as well as the amount of cash outflow that would occur from business operations.

How Equipment Financing Works

Equipment purchases are some of the largest expenses an SMB might incur. Examples of equipment needs include a contractor purchasing a skid steer, a manufacturer buying a CNC machine, a restaurant needing refrigeration, a medical clinic buying diagnostic equipment, and a delivery company purchasing a fleet. Each of these assets is expected to provide value to the business for a number of years.

Duration of the loan is also a consideration when appraising equipment financing vs. short-term working capital financing. The lender analyzes the business credit and cash flow, the equipment being purchased, the amount of cash/equity the business is putting in, and the proposed length of time for the loan. In many structures of equipment financing, if the equipment isn’t paid for, it is used to secure the finance agreement.

The FDIC advises SMB owners to match the type of financing to the purpose and advises that Financing term equipment purchases is more appropriate than short-term financing. In addition, SBA programs allow financing through participating lenders to purchase and install machinery and equipment, provided eligibility and underwriting requirements are met.

The payment on the financing plus the equipment is what an owner should look at. If equipment creates $8,000 in gross profit and financing costs $9,000 per month, the investment is not worthwhile, even if the piece of equipment is essential.

Quotes should be assessed beyond the pricing displayed. The real cost to the business can include delivery, installation, electrical work, software, warranties, taxes, operator training, and the first maintenance cycle. If a financing plan does not cover these costs, an owner may succeed in buying a machine, but would then have to purchase another short-term product to install it. A full equipment budget reduces the potential for a financially valuable asset to become a cash flow drain.

Why Businesses May Consider MCA Funding for Equipment

Equipment failures create a sense of urgency. If a key piece of production machinery is failing, each minute adds to the backlog and lost revenue. A proprietor may look to MCA funding due to the speed of the application, as it is less burdensome, and may consider recent commercial banking deposits over a rigorous collateral assessment.

There is a time-based concern. Funding your business quickly enables the organization to repair, replace, or meet a supplier’s equipment purchase deadline. The risk of such an undertaking is using a fast asset collection method on a slow-generating or appreciated value asset.

Merchant cash advances take a collection responsibility from the business organization’s revenue on a fast basis. If the new machine takes two months for the business to install and then for production to get prepared, the collections start before the business even has the financial benefits. The business then has to pay the financing while the operations are most disrupted.

Just because something is fast does not make it wrong. The owner needs to evaluate if the equipment produces revenue to fund the collection in a reasonable time to payroll and to pay suppliers and inventory.

Equipment Loans vs. MCA Funding

The best way to analyze equipment loans versus MCA funding is to match the life of the loan with the asset’s useful life. An asset that has an eight-year useful life can warrant a longer loan. A financing structure to pay for a six-month repair may need a different structure.

Cost must also be aligned. A loan will show you the interest rate, the true APR where available, the term, and the payment amount. An MCA will usually use the factor, purchased amount, and total amount due. You should not compare a factor to an APR.

The payment frequency can be as important as the total cost. Daily or weekly payment collections significantly reduce the time it takes the business to cash flow the newly acquired equipment. Financing that requires payment on a monthly basis greatly increases the time the sale is outstanding before the obligation is met.

The business owner has to look at the loss of production, the cost of installation, maintenance, insurance, operator training, and delivery, as well as the production ramp-up. The equipment may not equate to the actual cost of the project. Financing the equipment may fund the project, but it may have no cash available, which results in a working capital funding problem.

Matching Financing Terms to the Asset

Financing should be aligned with the purpose for which an asset will be utilized. A delivery van can start making money as soon as it begins operating. Other assets may need installation and testing. A new piece of medical equipment may need licensing and marketing. All of these factors can also affect the expected volume of patients.

Construct a basic return model. Estimate the monthly contribution to revenue or cost savings from the equipment. Subtract the operating costs, maintenance, insurance, plus the payment on the financing. Test the model by assuming lower revenue and an unexpected cost from an equipment failure.

This is the time to analyze current trading liabilities. If there are several obligations each day or week, financing another short-term asset may make the business more vulnerable. Money Man 4 Business helps companies obtain financing for equipment and those companies that want to refinance expensive MCAs or other business debt into better and more manageable solutions.

The owner should also think about the replacement cost and the resale value. Equipment with good resale value should be expected to have a good replacement value. Technology that is rapidly changing may have a good replacement value but low resale value. This can greatly impact the term and financing amount. The goal should not be to finance the equipment for the longest period. The goal should be to avoid financing an asset for a period of time that is much less than the asset taking value to the business.

Benefits of Monthly Equipment Payments

Equipment financing monthly payments for small business might be a long-winded way to say financing meant to simplify predictable payments, but the idea is simple. Equipment financing payments correlate to the benefit of the equipment you can expect to gain each month.

Money Man 4 Business offers financing programs with payment terms that range from 1 to 25 years based on the financing product, underwriting, and asset. Money Man 4 Business offers access to financing products to help business owners obtain financing through equipment, SBA, working capital, and consolidation financing to choose what works best for them.

If a business is already dealing with high debt costs, the financing solution through Money Man 4 Business may involve high equipment financing costs and consolidation financing. Money Man 4 Business says many clients can restructure debt to cost them 2/3 less in interest and fees than the high-cost debt they previously had.

Each financing solution can be modeled with the help of an experienced CFO.

Frequently Asked Questions

Can equipment financing cover used equipment?
Potentially. Eligibility depends on the lender, equipment type, age, condition, valuation, and the financing program.

Is Fast business funding a good choice when equipment breaks?
It can be useful when the cost of waiting is high, but the business should compare the repayment frequency and total cost with how quickly the repair or replacement will restore revenue.

Can SBA financing be used for equipment?
Yes, eligible SBA 7(a) proceeds may be used for purchasing and installing machinery and equipment through participating lenders, subject to program rules and underwriting.

Finance the Asset for the Time It Creates Value

Equipment financing has to be able to pay for itself while also sustaining the remainder of the business. You also have to consider the value it will bring and the cash flow after each payment. Look at several equipment loan options, MCA funding, and equipment financing loans for small businesses.

Money Man 4 Business provides owners with the opportunity to compare equipment, term, SBA, working-capital, and consolidation programs. The strongest structure is not always the fastest. It is the program that allows the equipment to provide revenue while the business retains enough cash to pay its employees, suppliers, taxes, and other business expenses.