Whether you’re planning to start a new business or looking for ways to expand its capabilities, there’s always a need to buy or upgrade your assets.
A significant business expenditure is a vehicle or any equipment that you need to run your operations smoothly. Regardless of the size of your company, purchasing machinery means incurring substantial costs.
Most businesses don’t have enough cash in hand to make an outright purchase. Even if they do, they prefer investing the working capital in exploring new growth opportunities to purchasing new equipment.
So, what’s your best option? Well, you can quickly get a car and equipment loan to meet your business needs without affecting the cash balance
Let’s say, you run a cupcake business, and to get ahead of the competition you want to add more vehicles to your existing fleet so that you can take more orders. You don’t have to pay upfront for all the vehicles. You could opt for the right car and equipment financing option to make the best use of any business opportunity.
Here are some details to help you understand this better.
What is a car and equipment loan?
A car and equipment loan refers to different commercial finance options that enable you to purchase or refinance vehicle and/or equipment for your business. It usually helps small businesses fund their large pieces of equipment such as heavy machinery or vehicles. Since every business need is unique, the types of equipment financing options are diverse.
Let’s check some benefits that you can have with a car and equipment loan.
- Adds to the net value: It’s a useful way for all sizes of businesses to finance their vehicle, machinery, or equipment without disrupting their working capital. It adds up to the net value of the business without blocking the capital amount.
- Spreads the cost of your purchase: Even if your business is well-established, cash flow remains a constant issue. You may not have enough cash on hand to make an important purchase. This is where an equipment loan comes in handy. It enables you to spread your cost, thus solving the cash flow problem.
- No need for extra collateral: In this type of loan, the purchased item itself is kept as collateral against the loan. If your business fails to make the payment, the equipment gets It makes it less risky for the lender, and thus it gets easily approved.
- Increases revenue: If you’ve done your research and know which vehicle or equipment can be useful for your business, it would mean more income for you. And an equipment loan can help you get that without making a noticeable dent in your operating capital.
Let’s check out a few steps that will help you easily secure a loan:
1. Check your credit score and resolve the issue, if any
Even though qualifying for a loan seems relatively easy with the purchased equipment itself becoming the collateral, lenders would still scrutinise your credit score, cash flow structure, and other factors before approving.
They will consider your ability to repay the loan. So if you have a bad credit score, getting a loan might get a bit difficult. You can review your credit score and clear up any issues before applying for a loan. Clear up your pending bills, take no further debts, find a co-signer with good credit score, and offer security to build up trust.
2. Research about the type of vehicle or equipment you need to meet your business requirement
When applying for a loan to purchase a vehicle or equipment, learn about its cost and useful life, meaning how long it can be expected to be in service before becoming obsolete for your business. Lenders generally don’t offer loans that outlast the life of the purchased items.
When you research about your equipment needs and costs, it helps you determine whether your loan term and repayment amount are appropriate. There are a few things you need to be aware of before applying for a loan –
- The minimum financial amount is $10,000.
- You can tailor your repayment option – monthly, quarterly, or yearly, whichever suits your business cash flow and budgeting.
- You are offered flexible loan terms – starting from one to five years.
- Age of equipment may vary, but generally up to 10 years.
- Loan can be used for both new or used vehicle and equipment.
- The asset serves as sufficient security for the financier.
3. Choose the best financing options
Small business owners have multiple financing options that can be used to get the required vehicle and equipment. Each comes with its unique benefits. Weigh down your options and choose the one that is the best fit for your business –
I. Commercial Hire Purchase
In a commercial hire purchase agreement, your lender buys the vehicle or equipment on your behalf and rents it to you for an agreed period with a fixed monthly instalment amount. Under this arrangement, you are responsible for any expenses associated with the vehicle such as registration, maintenance costs, and insurance.
And if your business is GST registered, commercial hire purchase would be worth considering as you can claim GST on the vehicle price, fees, and interest.
II. Chattel Mortgage
A chattel mortgage comprises two parts: ‘chattel’ means the vehicle or equipment you’re going to buy, and ‘mortgage’ is the loan you’d be paying back. When you purchase an item, you get possession of the vehicle, but the mortgage is applied to the item itself.
There are few benefits associated with chattel mortgage. Since it’s a secured loan, the interest rates are usually lower as compared to others. There is flexibility in choosing your repayment options to suit your cash flow. Depending on the amount of business utilization of the asset, you can also claim tax deductions on interest and depreciation
III. Finance Lease
A finance lease agreement is an agreement between the financier (lessor) and you (the lessee). You enjoy the full benefit of the asset in return for monthly instalments. One of the major advantages of finance lease is that you have the option to either return the vehicle or make an offer to purchase it at the end of the contract period.
Also, no deposit is required to finance the equipment; thus you can preserve your cash flow. It allows tax deductions on loan amount depending on the commercial usage of the asset.
Conclusion: Next step
Now that you know of different financing avenues and their benefits, the next step would be to decide which one is best suited for your business. Always keep in mind that the best car and equipment loan is determined by a combination of your business creditworthiness and your requirement details. If you want specific information for your business, please feel free to contact One 80 Financial Services. We’re always ready to help!
Whenever in doubt, always seek advice from your accountant before entering any financial product.