Posted about 1 month ago

4 Factors to Consider before Taking Equipment Loans

If you need equipment for your business but you do not have sufficient funds to purchase it, you’ll want to consider how you will pay for it. Equipment loans are a cost effective way of financing that purchase.

Although you can get favorable interest terms and rates from banks, their credit standards are strict. Ultimately, you need to ensure that you match the loan term with the expected life span of the equipment you are acquiring.

For instance, if you are buying equipment that you will use for five years, then go for a five-year loan term. The reasoning behind this is that a shorter term will leave you scrambling to make payments while a longer term will mean that you will be paying off the equipment long after you have stopped using it.

Normal 1497858246 Loan

Factors to Consider when Financing Equipment

As you set out to acquire a loan for the purchase of equipment, you need to keep in mind that banks will often not be interested in financing stand-alone equipment. Thus, you will do well to consider sourcing finances from a non-bank financial institution. This could be an organization you have previously had dealings with or a company that your vendor recommends for funding.

As you consider all the possible sources, you need to consider the following factors:

  • Prepayment penalties and fees–If you do not like being in debt, you may want to pay off the loan at the earliest opportunity. You need to find out if there are penalties for early payoff as this will increase your overall expense and subsequently increase your effective interest rate.
  • In fact, this is where most of the loan companies make more profit. Be sure to look out for loan solutions that do not incur high fees or prepayment penalties during the loan application process.
  • Hidden fee and auto renewal clauses–It is important that you carefully review contracts before you sign. By reading the terms carefully, you will be able to pick out hidden terms and fees. There are also auto renewal clauses that give the company a leeway to extend the repayment term if they are not notified within the specified period. These can add up to the amount you will be required to repay.
  • Rates–You may want to consider checking the rates that the company is offering you even though this should not be the only basis on which you make a decision. Remember, the other penalties and fees mentioned above may be more detrimental. Even then, you should not be misled by interest rates that are used to advertise the loans. Go a step further and scrutinize them. You will be surprised to find that the low interest rates will hardly be available for equipment financing.
  • Company background –It is advisable that you interrogate a company before committing to work with it. Financial experts will tell you to only work with those companies that you trust to provide the best terms and services.

Always ensure that you explore all the factors relating to the decision you will make before signing up for equipment financing.