You’ll still need a bit of cash on hand to use when financing equipment for your business.
Let’s explore some of the associated costs-
Just like when you buy a house or a car, equipment financing companies require a down payment on the purchase, sometimes ranging between 10% and 20% of the total price.
Some lenders may only finance the item itself without covering any soft costs like taxes or delivery fees.
Others, however, will allow a portion of soft costs to be rolled into the loan amount.
Perhaps the most important cost to consider is your interest rate.
That’s the amount of interest you’re charged on your principal balance, which is included as part of your monthly payment.
Obviously, the lower your loan rate is, the more money you’ll save over time.
Fixed interest rates could range between 8% and 30%.
That leads to another important factor in the determining your total costs: the loan term.
The average heavy equipment loan term is seven years.
If you have to decide between a lower interest rate over a longer repayment period versus a higher rate over a shorter period, do the math to determine which offer saves you more money over time.
You’ll also need to make sure you can afford the monthly payments.
A longer repayment term does spread out your monthly balance, but you’ll end up paying more interest over time.
It’s also a good idea to consult with your accountant on what works best for your specific company.
Another standard cost when borrowing from lenders is an origination fee.
You’d encounter this fee with just about any type of loan you can take out, so it’s not an uncommon practice.
Origination fees are typically calculated as a small percentage of the loan amount.
Depending on your lender, you might be able to roll the origination fee directly into your loan and pay it off as part of your monthly payments.
How Much Can You Borrow?
The size of your loan depends on the specifics of your intended purchase.
Some lenders only finance 80% – 90% of any type of business equipment loan.
That means if you want to get new heavy equipment and plan on purchasing $250,000 worth of construction machinery, you would only be able to borrow between $200,000 and $225,000.
You’d be responsible for paying the rest of equipment cost as a down payment.
Depending on the company you choose, there might also be a minimum amount you’re required to borrow.
Minimums sometimes range anywhere between $5,000 and $25,000 so this might not be a viable option for small purchases.
In a situation like this, you could either wait to buy more items in bulk or explore other small business loans or lines of credit.