Businesses need to secure the appropriate equipment to work at peak efficiency and keep up with competitors. Buying equipment, however, is very expensive, and companies resort to equipment financing for the same. Whether it be new machinery, technology, or vehicles that you are looking to acquire, determining your equipment financing needs is essential in making sure the correct amount of funds is borrowed. In this piece, we will take you through the essential steps necessary to calculate equipment financing needs.
Assessing the Total Cost of the Equipment
Before you do almost anything else, it is important to understand this question: How much are the equipment costs? But this is more than just the cost of admission for a machine or tool. The efforts are tackled together with the customer to avoid installation, shipping, tax, and insurance costs. These are accounts that the business should carefully calculate, since they could make an enormous impact when taken into consideration in the total amount of financing.
As an example, if you buy a piece of manufacturing equipment for $100,000 but then have to pay another $15,000 in shipping and installation, the total cost would come out as $115,000. Obviously, if you do not include these costs in your calculations and budget for them, then they may end up being additional amounts that are going to be charged to the business over what is already a large amount of money.
Evaluating Your Down Payment Capacity
Depending on the equipment cost at the start, you can make a down payment. Most equipment financing lenders will request that a business pay between 10%-30% as an advance payment towards the purchase price of your equipment. The down payment will just determine the amount of financing you need.
If you can make a larger down payment, you will reduce the loan amount and lower the total interest paid over the life of the loan. For example, if you plan to purchase equipment valued at $115,000, and you can make a 20% down payment, you would need to finance only $92,000. A smaller down payment will increase the amount you need to borrow and potentially result in higher interest costs.
Determining the Financing Term
The financing term is another critical factor when calculating equipment financing needs. The term refers to the time you have to repay the loan. Longer loan terms typically result in smaller monthly payments, but they also mean paying more in interest over time. Shorter loan terms, while reducing the total interest paid, can increase your monthly payment amounts.
If the question of loan term arises, how long can you expect to use the equipment? The ideal term of the loan should match up with when you can get used out of that equipment. Financing equipment over more than its expected lifespan: This can lead to a business paying for old, broken down, or valueless machinery, where it should be the lender taking on that risk. Conversely, if you choose a short-term, then your cash flow might struggle to keep up with the larger payments.
Factoring in Interest Rates
Interest rates play a significant role in the total cost of your equipment financing. The interest rate you are offered will depend on several factors, including your credit score, the lender’s terms, and current market conditions. A higher interest rate will increase your total loan repayment amount, while a lower rate can make financing more affordable.
When calculating your equipment financing needs, it is important to get quotes from multiple lenders and understand the terms they are offering. For instance, if you are borrowing $92,000 at an interest rate of 7% over five years, your monthly payment will be higher than if you secure the same amount at a 5% rate. By comparing interest rates, you can make an informed decision and reduce the overall cost of financing.
Estimating Monthly Payments and Cash Flow Impact
Since equipment financing requires a monthly payment, in order to decide whether you can agree to simply commit yourself to this financial tool or not, it is important for business owners to think about how these payments will affect their cash flow as part of the process before taking such a route. A detailed analysis of your cash flow will help to ensure that you can pay the loan instalment without affecting your other operational expenses. Most lenders have online calculators where you can plug in the loan amount, interest rate, and some other variables depending on what they consider, which will calculate your monthly payments.
For example, if you are financing $92,000 at a 6% interest rate over five years, your estimated monthly payment would be around $1,775. You need to evaluate whether your business can comfortably cover this payment while still meeting other financial obligations, such as payroll, utilities, and rent.
If the monthly payments are too high and could negatively affect your cash flow, you may need to reconsider the loan amount, extend the financing term, or explore alternative financing options, such as leasing or renting the equipment.
Planning for Depreciation and Tax Benefits
Lastly, a business is to factor in depreciation of the equipment and tax breaks, if at all for estimating their-equipment financing requirements. A lot of equipment depreciates quickly, which is suitable for businesses that need to include depreciation in their tax deduction. It is necessary to know how the equipment will depreciate and how it could affect your financial statements.
Moreover, equipment financing alternatives such as leasing may render several tax benefits. Meeting with a financial consultant or an accountant will be necessary to understand how these dividends are taxed and what deductions you can take.
The figure you come up with will depend on things like the total cost of your equipment, how much of a down payment you can pay, and finance terms and conditions — including interest rates and cash-flow implications. Through a diligent and methodical equipment financing process, organizations can access the capital they require to purchase essential items while reducing financial exposure. This not only helps you borrow the required amount but also allows your business to enjoy healthy cash flow and take advantage of tax benefits in all projects.
