The 5 Questions You Should Ask Yourself Before Financing Equipment

Asking questions is a crucial part of making informed decisions, especially when it comes to equipment financing agreements. Whether you've already chosen the equipment you want to purchase and the financing company you want to work with, or you're just starting the process, there are several factors to consider before signing on the dotted line. 

Understanding the agreement you're about to enter and its potential impact on your future financial decisions is essential. Fortunately, equipment financing can be a smart option that supports your business's growth by enabling you to stay current with the latest equipment, conserve capital, and maintain cash flow. To ensure you're making the best decision for your business, make sure you ask these five critical questions. 

1. What Type of Equipment Do You Need?

When considering equipment options, it's important to evaluate all choices available to you. While new equipment may seem like the most appealing option, it's worth noting that used or refurbished options can also hold significant value as assets. The decision on how much to invest in the equipment will depend on various factors, such as the type of equipment, its potential output, and its expected lifespan. Ultimately, the choice between new or used equipment should be based on what best suits your specific needs and budget.

In addition to assessing the value of the equipment, it's important to evaluate how it can help you achieve your business goals. For example, can the equipment improve productivity, reduce expenses, or enhance your competitiveness? After weighing these factors, you can make an informed decision about how much to invest in the equipment and the corresponding financing agreement.

2. Do You Understand the Difference Between EFAs and Simple Interest Loans?

While Equipment Finance Agreements (EFAs) and leases may seem identical, EFAs are actually considered a hybrid between a lease and a loan. Many customers are unaware of this difference, as they're more familiar with simple interest loans commonly used for personal vehicles or mortgages.

Jen Rakotz, client relations manager at Stearns Bank, explains that some customers are initially concerned with the lack of stated rates and the absence of a breakdown between principal and interest in EFA contracts. However, this advantage allows accountants to depreciate the finance charges in a way that best suits their business needs.

“Most customers are familiar with simple interest loans, and that is the standard when financing personal vehicles or mortgages. They expect business loans will follow suit.” - Jen Rakotz

The two key differences between EFAs and simple interest or consumer loans are the absence of stated interest rates and the lack of a breakdown between principal and interest. Instead, finance charges are calculated into a stream of fixed contractual payments over the chosen term. Customers are responsible for the gross contract amount, which is the sum of the contractual payments.

3. Which Financing Company Should I Work With?

Choosing the right financing company for your equipment purchase is crucial for your business's success. The company you select should have experience in your industry and a deep understanding of the equipment you plan to purchase, as well as how it can benefit your business. They should also keep up with any industry changes or opportunities that could impact your purchase.

At Stearns Bank, credit decisions aren't based solely on credit scores from various reports. Instead, the transaction needs to make sense for your business. Custom financing options are based on your business’s specific needs, such as seasonality, cash flow, and budget projections.

Overall, choosing the right financing company for your equipment purchase can make a significant difference in the success of your business. Look for a company with industry experience, knowledge of your specific equipment needs, a proactive approach to industry changes, and customized financing options. 

4. Is Your Credit up to the Challenge?

Having strong credit is crucial when seeking financing for your equipment purchase. While credit scores are not the only factor that financing companies consider, they play a significant role in the decision-making process.

Before applying for an equipment financing agreement, review your credit reports and ensure that any inaccuracies or surprises are explained with valid reasons. Remove any suspect accounts that were falsely reported and verify that your payment history is accurate.

In addition to credit scores, financing companies will likely require other financial statements to assess your eligibility. Be prepared to provide tax returns and other financial statements from the recent past to support your application.

5. Do You Understand How Financing Will Affect Your Bottom Line?

For anyone that has used equipment financing in the past, you most likely know about the tax benefits. A business owner should understand the tax benefits of financing and investing in new equipment.

The Section 179 tax deduction allows businesses to write off portions of their financing cost of new and used equipment that is put into service during that current tax year.

Take time to learn about Section 179 and consult your tax advisor to determine how it could benefit you.

Equipment Financing With Stearns Bank

Stearns Bank is your trusted partner for equipment financing, providing expert guidance and customized financing solutions that meet your unique needs. With a deep understanding of various industries and a commitment to exceptional customer service, the experienced equipment financing team is dedicated to helping you achieve your business goals. 

When you partner with Stearns Bank, you'll have access to expert guidance, competitive rates, and exceptional customer service. If you're ready to take your business to the next level, reach out to our team today.