Equipment Line Of Credit: What Is an Equipment Line of Credit?
An equipment line of credit is a type of alternative financing that allows you to buy equipment or machinery for an extended period instead of paying for it once. Common equipment and machinery purchased through alternative financing include:
- Industrial and factory machinery
- Restaurant Equipment
- Healthcare equipment
- Office tools and furniture
- Farm machinery
- IT equipment
You can obtain, replace or upgrade all these assets through an equipment line of credit.
An equipment line of credit is a type of alternative financing that allows you to buy equipment or machinery for an extended period instead of paying for it once.
What Are the Benefits of an Equipment Line of Credit?
An equipment line of credit is a more flexible way of getting funds. As opposed to traditional term loans, this line of credit is much easier and faster to access. It only takes a few days for your loan to be approved and funded. In addition, approval criteria can be more flexible than those provided by banks or credit unions. A private lender may help arrange re-payment solutions that accommodate your unique business cash flow situation. Isn’t this good news for entities in need of immediate cash and lack massive cash flow?
How Do Equipment Lines of Credit Work?
Just like other types of loans, equipment lines of credit requires the borrower to make periodic payments. Often, the payments are done every month and are calculated based on the value or price of the financed asset.
The equipment purchased serves as collateral for the loan. As collateral, the lender can seize the asset if you default in payment of the agreed periodic installments. Nevertheless, your business can continue maximizing its productivity using the asset as you make periodic payments.
The term of the credit can vary depending on the lender. But which factors determine the repayment period? Some key factors include the loan amount, appraised value of the equipment, ease of reselling back into the market and how well the equipment holds its value over time.
Some lenders may agree to finance the full value of the equipment. Alternatively, most may opt to finance up to 80% of the equipment price. In such a situation, you’ll have to make a down payment to cover the rest of the equipment value.
What to Consider Before Taking an Equipment Line of Credit?
Before getting an equipment line of credit, you should take some time and consider the following.
- Business Stage of Growth: If you are a start-up or a growing company, you may have limited financing options. Traditional banks may be scared of helping you finance the equipment you’re looking to buy and put restrictive covenants and clauses on your loan. However, that’s where alternative financing comes in. Alternative financing can help provide more flexible approval requirements and more customized repayment terms that meet the needs of your unique business.
- Type of Equipment: Using an equipment line of credit to buy heavy and costly equipment or machinery is much wiser. WHY? Because you have just bought time, and time is money. Instead of waiting to save up enough cash, you can start putting the equipment to work to help generate more revenue a lot sooner. You end up making more money than the cost of the line of credit. What kind of equipment should you consider getting a line of credit for? Any kind, as long as it’s for your business. Some common businesses that see the most benefit are transportation and logistics, warehousing, construction, manufacturing, restaurants, agriculture, energy, utility, and cannabis, etc..
- Cash Flow: Can I afford it? If your cash flow is positive and depositing more than $10,000 per month from your business, it’s a good start and indicator that you can look into getting an equipment line of credit.
Pros and Cons of Equipment Line of credit
- Increased Productivity: Utilizing equipment lines of credit, your business now has more equipment that you can put to work to generate more revenue. This is a prime example of healthy debt, where you can see it as an investment, only an intangible one. You can’t physically see or touch it, but you can definitely get a return on investment from it, if used properly. Equipment lines of credit can help your business increase productivity by adding new equipment to generate more revenue faster.
- Fast Approval: Generally, the equipment line of credit is much easier to and faster to approve than term loans. For purchasing new equipment, you generally just need a proforma invoice from the supplier, a few months of recent bank statements and some general business information via a simple application and you can get approval in as fast as 48 hours and funding within 72 hours.
- Improved Business Credit: Equipment line of credit is a healthy way to build your credit score. If you pay the installments well, your credit score rises, which makes future borrowing much easier with higher limits.
- High Purchase Costs: Purchasing costs through an equipment line of credit are higher than having cash to buy the products outright. But even if you did have the cash, as mentioned earlier in this article, if used properly, an equipment line of credit buys you time and actually helps generate more and potentially higher revenues for your business.
- Debt Obligations and Risk: Make sure you are making the repayments on time. Equipment lines of credit are very useful to helping your business grow, but if abused or not utilized properly, can work against you.
Where Can I Get A Equipment Line of Credit?
From traditional banks, credit unions to alternative financing options, there are a lot of choices.
Whatever you decide as your preferred solution for equipment financing needs, it can be a good source of leveraged capital to helping your business grow faster and sooner.
If you are interested in a fast and simple option through alternative financing.
FV Vantage can help you along your way.