Equipment acquisition is an important aspect to consider if your growth strategy involves improving business operational efficiency to enable scaling your SME. By investing in new equipment, businesses strive to improve their productive capacity and product quality, or streamline operation while keeping up with evolving industry standards. Moreover, equipment purchases enable businesses to provide better services to their customers. However, while increased productivity is closely linked with working smarter, it’s important to consider that purchasing new equipment often requires a large sum of money. Fortunately, equipment loans can help you cover the costs of buying new machinery if your current funds don’t suffice.
What is an equipment loan?
An equipment loan is a common financing solution for businesses that need new equipment or vehicles, but lack the financial capability to pay in cash. In most cases, the immediate returns from the newly acquired equipment can be used to cover the monthly payments for the loan. This makes equipment loans a more strategic financial decision compared to secured loans from traditional banks, which oblige business owners to pledge their assets as collateral.
Does your business need an equipment loan?
An equipment loan is an important financial decision. In most cases, business owners decide to take out an equipment loan to replace their old machinery, to upgrade the ones they are currently using, or add to their existing fleet.
There is a myriad of factors that contribute to the reason business owners decide to replace the equipment they are currently using. The most common factors include deterioration and obsolescence, which frequently result in unsafe working conditions, capacity limitations, and decreased profitability.
- Deterioration. When the equipment has been in use for a long time, its performance may start to decline. Deterioration can be managed with regularly scheduled maintenance, but eventually, all equipment shows signs of wear and tear.
- Obsolescence. The quick pace of advancements in technology makes some equipment obsolete faster than expected. Keeping up with this fast progression of technology can be really hard for some businesses, especially small ones.
- Risky working conditions. As equipment deteriorates or becomes obsolete, it may stop functioning properly, causing hazards for workers.
- Decreased profitability. Old equipment may eventually perform inconsistently or simply be unable to keep up with newer models, resulting in defective products and inability to keep up with production demand.
There are some companies that have a strong policy on automation modernisation. These companies prioritise innovation by constantly keeping the performance of their equipment in the best condition. They make sure their equipment is up-to-date with new technology so that it performs at or above expectations.
Some companies choose to purchase additional equipment when they realise the output capacity of their current machinery is insufficient to meet production requirements. Hence, they invest in additional machinery to meet the demands of their customers.
Equipment Loans vs. Equipment Lease
Financing options for businesses that want to upgrade their equipment are not limited to equipment loans. They have the option to sign an equipment lease.
An equipment lease is similar to renting an apartment. But in this case, you’re renting equipment. You (the lessee) and the owner of the equipment (the lessor) you’ll be renting from will sign a lease contract indicating the terms and conditions of renting the equipment. Keep in mind that in an equipment lease, the ownership of the equipment remains with the lessor. As such, the lessor has the right to cancel the contract and take the equipment if the agreement has been breached by the lessee.
While there are some cases when business owners prefer an equipment lease over an equipment loan, most still see the latter as a better investment. When business owners calculate the costs of acquiring new equipment over leasing it, they often realise that purchasing a new vehicle or machinery through an equipment loan makes more financial sense than leasing.
The Pros and Cons of equipment loans
For businesses that are considering an equipment loan, knowing the full benefits of this financing option can help them make a smart and strategic decision. Here’s a rundown of the benefits of equipment financing:
Business owners will enjoy unencumbered ownership of the equipment they purchased after they finish paying off the loan (the lender can’t seize the equipment once your payment obligations are fulfilled). Completing the loan payments has several advantages for businesses: that include improved cash flow due to less rental fees, elimination of the possibility of equipment seizure for contract breach, and improved financial leverage (ability to borrow again for further expansion plans) by clearing the loan obligation off your balance sheet.
Solves budget deficiencies
Business owners who purchase equipment through an equipment loan will not be obliged to pay for the machinery in cash. The regular monthly payments will help them acquire the equipment without spending a large sum upfront, which could cause cash flow challenges.
No additional collateral required
An equipment loan is among the self-collateralising business loans available in the Philippines. The equipment purchased will serve as collateral to ensure payments are made.
The processing period for an equipment loan is shorter than traditional bank loans. As soon as you submit your documents, the finance provider will immediately process your application. You can get the equipment you need promptly.
While an equipment loan offers plenty of benefits, there are also some drawbacks to keep in mind. Here are some important points to consider before applying for an equipment loan:
Due to interest rates and other charges that the loan will incur, the total cost will be significantly higher than if you purchased the equipment in cash.
Since you retain possession of the equipment while the loan is in effect, maintaining it will also be your responsibility. Regular cleaning and routine checkups for your equipment are just some of the things you need to do to maintain your new equipment.
The equipment loan is intended to help business owners purchase equipment for business. Therefore, any required accessories will not generally be covered. Same goes for the items you need to run the equipment, like gasoline.
Alternatives to Equipment Loans
If you’re looking for a viable financing option to purchase equipment, it’s imperative to choose loan products that work to your advantage. FinTech companies like First Circle offer easily accessible business loans in the Philippines that have a quick and easy application process.
If you’re not sure if equipment loans are for you, there are still other alternative financing options you can choose from. There are many FinTech companies here in the Philippines like First Circle that offer Invoice Financing and Purchase Order (P.O.) Financing. With Purchase Order financing in particular, you may use your purchase orders from clients to get financing. Even more, their application process is much simpler than traditional business loans. You just
need to follow these 3 steps: complete the KYC form, submit a purchase order or an invoice, and access your funds once your application has been approved.
Should you purchase new equipment now through financing or wait until you have enough cash on hand to pay for the equipment in full? There is no simple answer to this question, but assessing the situation from a business perspective could help you decide. If you have strong reasons to hold off equipment acquisition, that’s fine. But if you’re certain that your company will be able to cater more to the needs of the customers through equipment acquisition, make that investment today.
Equipment loans give business owners the opportunity to acquire much-needed equipment that also serves as collateral to ensure payments. As such, it is one of the most practical SME loans in the Philippines.
However, if you think equipment loans still don’t exactly fit your current business needs, then there are more alternative financing options to fund your equipment purchases; like Purchase Order Financing and Invoice Financing which are both offered by First Circle.
First Circle is a private FinTech company that encourages SMEs to unlock their full potential by providing easily accessible funds to cover capital gaps and pursue new business opportunities.
Click here to apply for business financing.