Financing Equipment Purchases

Unless your business has unlimited cash reserves, chances are that at some point you're going to have to finance an equipment purchase. In fact, even equipment that you purchase for cash is in one sense financed, if you end up borrowing to meet other needs because the purchase depleted your working capital. So, you really should view equipment financing as just one piece of your overall financing strategy for your business.

If you anticipate financing an equipment purchase, compare the credit packages offered by your bank, independent financing companies, and the equipment's manufacturer and vendors. These packages can vary greatly in terms of downpayment amounts, interest rates, loan durations, security requirements, late payment charges, and similar provisions.

With respect to security requirements, make sure you understand what each package will require as collateral. Will the financed equipment be the only collateral or will you be required to put up other assets as well? If you must put up other assets as collateral, check your existing financing agreements to ensure they don't contain any restrictions on your ability to encumber those assets.

Apart from collateral requirements, carefully review any restrictions that the lender may propose to place on your operations. For example, the agreement may attempt to limit the amount that you can draw from your business as "salary," to require you to secure the lender's permission to further asset acquisitions, or to equate certain financial conditions (falling below a minimum cash balance, failing to maintain a specified working capital ratio, maintaining excessive inventory levels, etc.) with an "act of default." Honestly assess whether you can in fact successfully operate under any such restrictions before you sign the agreement.

For more information on equipment loans, see our detailed discussion of getting financing for your business.