Equipment financing is a useful alternative method for small business owners to pay for some of their most important items. Many small businesses are dependent on equipment and machinery for their operations. Broken or faulty equipment can lead to serious problems, while top-of-the-line equipment can give your business an edge over competitors. There is much to think about when deciding to take out a loan or use any kind of financing on your business. Here are some of the signs; it’s time to consider equipment financing for your business.
Repair Versus Replace
Deciding whether to repair or replace old equipment comes down to a number of things. First off, is the equipment or machinery still under warranty? If so, you should file the required paperwork and ensure that the company who manufactured the product lives up to their warranty. If, however, your machinery has broken down due to a mistake or is just boiler-plate wear-and-tear, you have to decide: Should you pay to have the machinery or equipment repaired? Or should you replace it with something new?
The 50% Rule
When it comes to deciding whether to repair or replace an aging piece of equipment, business owners often use the “50% rule.” This rule simply states that if a machine’s repairs exceed 50% of its total cost, then you should replace the old equipment rather than repair it.
You can use equipment financing to either repair or replace your old equipment. Even if your equipment is still working okay but is obsolete, you may consider equipment financing. This is true in the case of computers and other pieces of hardware that do not have a very long shelf life.
Rebates and Tax Credits
Another thing to keep in mind when it comes to buying new equipment is potential tax credits and rebates. There are many federal and state-based tax credits available to small business owners who spend money buying new equipment. This is something you should include in your calculations when deciding between repairing versus replacing your old equipment.
Your Employees are Frustrated
If you notice that your employees are frustrated with your business’s equipment, that is a surefire sign that it is time to consider equipment financing.
There is nothing more important than a good workplace culture. If your employees constantly have to deal with faulty equipment, machinery, or computers, that pretty much guarantees they will get annoyed, complain, and pollute your company’s workplace culture.
Another thing to understand is that it is often a good idea to provide your employees with top-of-the-line equipment. This is especially true in the case of computers, as a fast computer makes an enormous difference over a slow one.
Hardware technology like desktops, laptops. Tablets and Smartphones all play a major role in the success of your company. Unfortunately for small business owners, all of these products have a very short shelf life. You may buy the best desktops on the market for one year, only to discover two to three years later that the industry has advanced tremendously and that you and your company are now behind the curve. Such a scenario is ideal for equipment financing. Why? Because rather than wasting large amounts of capital every few years buying new computers, small business owners can simply take out period equipment financing so that by the time they pay one loan off, they will be ready to upgrade their equipment and take out another. It’s a way to stretch payments out over a number of years and ensure that you never run low on working capital or miss out on advancing technology. Your employees will be happy, and so will your wallet.
Your Software Won’t Update
Another surefire sign that it’s time to consider equipment financing for your business is if your software refuses to update. Not being able to update software usually only occurs on older hardware. After a certain number of years, software manufacturers like Windows and Apple will make it so that older hardware can no longer update.
Some businesses find loopholes and other backdoor methods for keeping their old software and not updating them. But this is a mistake. Even if there is a learning curve for new software, it is generally worth having employees bite the bullet and embrace the new updates. Most of the time, they become mandatory eventually anyway, so you might as well get used to the new software sooner rather than later.
If your software won’t update due to old hardware, it’s probably time to apply for equipment financing.
Your Employees are Overwhelmed
If your startup or small business has competent, hardworking employees who, you notice, are regularly overwhelmed and stressed out, you should try to figure out what is wrong. There are many reasons why this might be happening. Perhaps you are under-staffed, perhaps your business operations need some tweaking or, maybe you need new equipment.
There are few things more annoying and productivity-killing that bad equipment. It is your job as the business owner to empower your employees by giving them the best possible equipment that you can afford—otherwise, you are trying their hands and making it more difficult for them to be successful.
Talk to your employees and see if they are satisfied with the equipment and machinery you have them using. If not, it may be time to take out some equipment financing.
You Are Spending Too Much Time and Money on Repairs
The 50% rule has already been mentioned. But, sometimes, there is not a single, large repair to calculate. Certain older pieces of equipment may require regular, minor types of maintenance. This sort of thing is to be expected once-in-a-while, but if repairs become a regular part of your operations, then it might be a sign you should buy new equipment. You can research the maintenance costs associated with your equipment or machinery and determine if the amount of time and money you are spending on repairs is above-average before deciding if you should repair or replace your old equipment.
You are Coming Up on the Off-Season
As a small business owner, the last thing you want to do is shut down operations in the middle of your busy season. Even if this means making some temporary machine repairs to make sure you get through your most busy annual period, it is often worth it. But, once the busy season is over, it may be a sign you are ready to make those long-needed changes to your equipment or machinery.
Another reason it’s a good idea to wait until things are slow before making any major equipment changes is that with more complex equipment, there is often a learning curve. Let’s say you take out some equipment financing on a new forklift for your warehouse. Forklifts have a very long shelf life and generally make a good candidate for equipment financing because they are very expensive. All of this being true, you are still likely going to want to wait until the off-season before you replace an old forklift with a new one. Why? Because your forklift operator takes time to get his bearing with the new machine and it is far better for him or her to learn how to use the equipment when things are slow versus when time is of the essence.
Your Computers Are Not Performing
Computers are perhaps the most complex business equipment involved in your business. These days nearly all businesses use computers, and many of them are totally dependent on them. The thing about computers, though, is that they age very rapidly, as such it may be a good choice to replace them once they start showing signs of wear and tear or exhibiting other signs of age. There are plenty of IT companies that will recommend an endless series of repairs and updates for your aging computers, but remember the 50% rule and remember that, with a computer, you may want to reduce that 50% rule to an even lower number—perhaps only 30%. So, say your computer repair costs are equal to or greater than 30% of the total cost of the computer, you may want to consider replacing the machine using equipment financing.
You Have Great Credit
Most types of small business financing require at least some credit. There are exceptions (like invoice factoring), but generally speaking—the better your credit, the most likely you are to get approved for a small business loan. The same is true of equipment financing.
If you are deciding between buying equipment for your business outright or paying for it though equipment financing, having good credit gives you greater flexibility. On the one hand, if you buy your equipment outright, you will own it completely and will not have to pay any interest. The downside, though, is that you may drain your business’s bank account or make it so that the amount of working capital you have available is dangerously low. On the other hand, if you have great credit, you can receive very favorable equipment financing rates. Not only that but when you finish paying off your equipment financing, you will actually improve your credit even further.
While it may feel good to own something outright and not have to “worry” about monthly payments, it is rarely worth sacrificing the financial stability of your company over a desire not to have to make monthly payments. If buying new equipment is going to dramatically reduce the amount of capital you have to operate your business on a day-to-day basis, then it may not be worth it—you should consider equipment financing. Why? Because low amounts of working capital can cause serious problems. Let’s say you decide to buy new equipment for your business outright instead of financing it. Then, the following week a large opportunity arises which requires you to invest a sizable sum. It’s possible you will not have the money on-hand because you spent it all on equipment even though you didn’t have to. Therefore, even if you can afford to buy your new equipment outright, it isn’t always the right decision to do so.
Supplies for Your Machinery Are Becoming Scarce
When certain kinds of machinery become obsolete or outdated, you will begin to notice that it gets harder to find supplies for them. Let’s say you have a commercial printer. For the first few years, it will probably be easy to find ink and other supplies for the machine. Fast forward a decade or so, though, and finding those supplies may prove difficult. If this is the case with your business, do not resist updating your equipment by spending time locating what remaining supplies there is. Rather, update your equipment. Remember, even if your credit is bad, if your small business needs new equipment, you may be able to qualify for equipment financing as it does not generally require as good of credit as other types of loans or financing.
You Have a Lucrative Opportunity
If you are in business long enough, it is likely that at some point, an opportunity will arise for you to either grow your business or for you to make a purchase at a fantastic price. Let’s say you own a small farming business and come across a used tractor being sold for an incredibly low price. Even if you can not afford the price out-of-pocket, you may feel that to pass-up the opportunity would be a mistake. This is the sort of situation where equipment financing can help.
Similarly, if you must choose between two equally important expenses—say, repairing in new machinery or making a highly lucrative investment in your business’s growth—you may choose to finance the machine repairs so you do not have to pay upfront costs and will then have more money to put into your investment opportunity.
Equipment financing is a convenient option for entrepreneurs who are dependent on equipment or machinery for their businesses to operate. If this includes you, then you should look out for the signs described in this article. If you notice one or more of them, you might want to consider equipment financing for your business.