How Can Businesses Fund New Equipment Without Using All Their Working Capital?
Businesses need new equipment and machinery from time to time to increase the efficiency of their production. In such a case, it is important to smartly arrange funds for the purchase of new equipment.
Definitely, putting the burden on working capital is not a wise thing. Otherwise, it can affect daily operational needs for inventory, utilities, wages, supplier payments, rent, etc. Thankfully, choices are available.
Funding solutions for an equipment purchase
Of course, multiple ways to obtain funds are available. If you want to buy an asset that supports growth plans, borrowing funds is possible. Let’s simplify equipment financing without transferring the burden to working capital and daily financial requirements. Here are your choices.
- Consider taking asset finance.
Asset finance is a broader funding option for equipment financing. To purchase any kind of commercial equipment or machinery, you can choose this option. In fact, asset finance for new business equipment is a popular option.
This also works in the same way as equipment financing. Without paying all the cost upfront, you can borrow funds and repay them in equal, affordable instalments.
The difference between equipment finance and asset finance is that the latter is mainly used when the machinery or equipment is expensive. It means that if the purchase includes a higher cost, asset finance is considered the more suitable option.
- Use equipment financing.
Equipment financing is the most relevant option for equipment purchase. Through this, you can purchase equipment or machinery. Its strongest benefit is that the cost of equipment is distributed in equal monthly instalments. This way, you can preserve your business savings and also keep working capital flow smooth.
Once you fully pay the instalments, ownership of the equipment transfers to you. However, before borrowing, it’s important that you compare the options of borrowing solutions in terms of total cost instead of monthly repayment.
- Leasing is the best for temporary use
Leasing is about taking equipment and paying rent to use it. It is a suitable option in that case if the equipment gets outdated easily. For example, medical equipment, specialist equipment, or certain technology or machinery.
The biggest benefit of leasing is that it does not put the burden of committed repayments on your business finances. In fact, it gives you the liberty to end the agreement as per your choice.
There can be leasing agreements with the options of renewing, returning or finally purchasing the equipment. If you choose this option, carefully consider the maintenance, mileage, end-of-term charges and usage terms and conditions.
- Hire purchase is also a relevant solution
Hire purchase commercial equipment or vehicles to purchase is a popular option. In this, you get the option to purchase equipment or machinery through affordable instalments.
For those businesses that ultimately want to own the equipment, this option is suitable. Due to pocket-friendly instalments, this does not put an additional burden on your working capital and cash flow. Because of predictable repayments, an instalment payment plan is possible. It easily fits into your monthly business budget.
For a safer application, check your repayment ability, use a loan calculator and know how much you can afford as instalments. It may or may not include a deposit. Also, you should check other factors like the final payment and administration fee.
- Consider taking a line of credit
As you know, a line of credit is a borrowing solution that provides you access to funds in a recurring manner. It is a great option if you want to avoid paying loan instalments and use the funds as per your requirement.
You can choose to pay for equipment in small amounts using the line of credit. If you choose to go for this option, check credit limits, interest rates, repayment requirements, and applicable fees. Also confirm whether the unused part of the credit incurs any charges or not.
A line of credit is a suitable option if you want to manage other finances as well along with the equipment purchase. Maybe you need to wait for a technician and installation after purchasing the asset.
- Business loan
Definitely, this option does not need any detailed introduction. Business loans, whether short-term or long-term, are available for every purpose. When it comes to equipment purchase, you can choose either short-term or long-term secured options.
If you are taking unsecured business loans, you can borrow funds as per the business’s repayment ability. For this option, you do not need to provide any collateral. But if you want to take secured loans, you can borrow a larger amount. It is mainly used if you are buying high-cost equipment.
Just like hire purchase, a business loan is a suitable option if you want to own the equipment. Secured loans have a lower rate of interest, while unsecured ones have a higher rate of interest.
Another loan type is a growth capital loan. These are used for any purpose that supports future business goals. Search online and find plenty of options for growth capital loans for equipment purchases. But like other loan options, these are subject to affordability assessment.
Conclusion
All the options above are designed to help you purchase equipment strategically. The options help you keep your business finances organised. You neither have to worry about hefty repayments for equipment purchase, nor do you have to worry about receiving additional burden on your working capital.
Based on your business creditworthiness, choose any of the alternatives. Make sure you invest ample time in exploring varied finance options and finance providers.
FAQs
- Can start-ups use equipment finance to purchase their first business assets?
Yes, it is possible, provided the business has a trading history of 6 months. Otherwise, secured borrowing solutions are available.
- Does equipment financing always require a deposit?
No, not all options require a deposit. The options of leasing and a business line of credit can be used for equipment purchase without a deposit. Unsecured business loans also do not require an advance payment.
- What happens if the equipment becomes unusable before the finance is fully repaid?
Firstly, inform the lender in time. You will get a new repayment plan as per the latest financial circumstances. Also, payment holiday options may be available.
Lee Copper is an experienced financial content specialist helping businesses explore the UK loan market. He writes guides led by experts on business loans and finance products. His work follows strict editorial values to ensure reality, applicability, and simplicity for readers to make well-versed financial decisions. Lee creates in-depth guides backed up by research, industry best practices, and the latest market developments.
