7 Equipment Financing Mistakes to Avoid

By Steve Harnden
Jan 15 / 1143 Views

Deciding how to finance your equipment is a big decision for any size business. There can be a lot of nitty-gritty details when it comes to determining how to fund such a large investment. Usually business owners don’t have the luxury of time to determine the best equipment financing solution with thorough research. Because of this, mistakes can be made and legal headaches can follow. But if you keep the following blunders in mind, you can avoid the most common equipment financing mistakes and help your business thrive.

Mistake #1. Not seeking all your options

Many business owners make the mistake of thinking their personal bank is the only option for equipment financing. In reality, funding can come from several sources including banks, finance companies, credit unions, and captive financing (an equipment dealer or manufacturer). If your business is serious about acquiring new equipment, check out all of your options. By exploring the various financing opportunities available, your business can secure financing terms, conditions, and costs that better meet your needs.

Mistake #2. Not knowing your lender

Lender-who? Remember, you are entering into a long-term relationship when you finance equipment. This is a big investment, so finding someone who’s on your side is essential. If you’re not familiar with a potential lender, ask your current equipment vendor for insight. Here’s what to ask your potential lender to get the ball rolling:

  • Why should I finance with you?
  • Do you have any references?
  • What’s your Better Business Bureau rating?
  • Are you self-funded or a broker?
    • Direct lenders retain servicing of a loan or lease while brokers act as a middle man with a larger lender.
  • Who can I talk with if I have more questions?

Mistake #3. Entering with unrealistic expectations

Not considering your credit when looking over financing solutions is one of the biggest mistakes you can make.  Credit and financing are directly related. Prior to applying for financing, you should access your credit report and familiarize yourself with your personal credit scores. The lower your credit risk, the lower your financing cost. Applicants with a poor quality credit history often don't qualify for the lowest cost financing. Having this knowledge beforehand can help the process run smoother for you and your potential lender.

It’d make sense to have an idea what your FICO credit score is as well. Sites like Credit Karma will give you your credit score without any unnecessary commitments. Understanding whether your credit is strong, mediocre, or weak will allow you to set reasonable expectations. If there are any errors in your credit report, you should try to correct them before seeking financing. Also, by knowing your credit score, you’ll know what the lender will be looking at, and can be certaim your lender isn't underestimating it.

Mistake #4. Using rate tunnel-vision

As busy people, we may skip straight to the large sum that’s due in our bills and ignore the incidental details. It's like going stright to the instructions of a recipe before taking stock of the ingredients. You just can’t go wrong by looking at the individual items in your daily life, as well as your equipment financing payments. Your monthly payment is only part of the overall financing equation. There are many additional factors that will influence the quality of your financing including the following:

  • All-in initial cash requirement
  • Term
  • End-of-term obligation
  • Pre-payment penalty
  • Equipment upgrade options
  • Potential fees

Equipment Financing Mistakes

Mistake #5. Not balancing cost and cash flow

Most equipment buyers don’t want to pay too much long-term, but they also want a low monthly payment. If you select a term that’s too short, you save money but at a great sacrifice to your cash flow. If you select a term that is too long, your cash flow benefits because of a low monthly payment, but you may pay too much. The key is to find the proper balance that satisfies your business’ cost and cash flow requirements, even if that means having a longer lease or more expensive payment than expected.

Mistake #6. Not getting it in writing

There are many variables and conditions contained in the standard equipment financing contract. Don’t cut corners by choosing a lender based on a “verbal” quote only. It’s extremely important to get any agreement in writing. Require your potential lender to provide you with a written financing proposal that details your all-in initial cash requirement, monthly payment, term, and end-of-term obligation. Also require your lender to clarify who will be servicing (sending you monthly invoices for) your loan or lease. Finally, read your equipment financing documentation to avoid potential surprises.

Mistake #7. Not determining what you can comfortably afford

Unlike a home mortgage, in which people look long and hard at what they will be able to pay over the next 10 to 30 years, equipment buyers don't always make the same consideration. “It’s only for five years” is a familiar excuse for not evaluating the impact of these payments on your budget. Before buying equipment, you need to consider how much money you can put down and what type of cash flow you anticipate to generate from the equipment you’re acquiring.

To wrap it all up

Finding an equipment financing solution can seem cumbersome with all these factors to know and avoid. But if you keep in mind your credit, cash flow, and what you can afford in monthly costs, it’ll be a piece of cake. This shouldn’t have to be a time-consuming process either. It’s your business after all. So do your homework and have an understanding with your potential lender. These steps will help you find the right match to finance your next equipment purchase in no time.

 

  •  credit 
  •  credit score 
  •  equipment financing 
  •  mistakes 
  •  monthly payment 

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