Equipment financing vs Small business loan

I've never done either one, but my assumption is that the equipment seller is going to mark up the cost of lending you the money to buy his equipment. I figure a straight bank loan would be cheaper, but I'm interested in hearing from those with actual experience in this regard. (I also figure that a home equity line would be the least expensive option of all, since it's a very low-risk loan and thus carries a low interest rate.)

As with most things I think the answer will be "it depends". If you have a specific set of equipment you want to purchase and that's it, an equipment loan will probably be cheaper from a financing standpoint. The interest rate will be less (prime + some nominal % depending on your banking relationship) however the term will typically be less. Usually 72 months max. My experience has been in your mind look at an equipment loan just like a vehicle loan; you're borrowing only what's needed to buy what you want and using what you're buying to collateralize the loan.

If you don't already have the equipment identified and priced and if you're not sure you'll need more or have other potential capital expenditures on the horizon the SBA loan might make sense. It's looked at as a working capital loan and can be used for whatever business related expense you choose. You'll collateralize the loan with a UCC filing on the business assets rather than the specific items being purchased with the loan funds. I was recently quoted prime + 2.75% for a 10 year term so it's more expensive but can be amortized over a longer period.

Alternatively to both and depending on your banking relationship and history you might check to see if they have some type of flex loan. This acts like an interest only line of credit for a predetermined amount of time (6-12 months) with a limit of whatever you and the bank have negotiated. This allows you flexibility on when you make the purchase(s) or the opportunity to jump on a screaming deal that crosses your path. Then when the time is up it converts to a standard term loan for whatever amount you wound up spending. If you don't spend any of it then it didn't cost you anything but the time to set it up. If you did buy something you're paying structured monthly debt only on what you borrowed.

Good luck!

Getting the bank loan on something they really, really, really do not want for collateral is the trick. There's a fairly short list of things that most banks like as collateral. A whizbang watchimacallit with buttons isn't on the list.

Based on my experience in equipment sales, if you use a manufacturer's leasing program you're probably going to pay full retail price for the equipment, whereas if you pay cash you might get (depending on brand / vendor) as much as 20% discounted. So you need to make sure you understand what you're paying in order to make an informed decision.

several rounds of gear purchases (typically a robot/antenna/2 DCs each time) i did via 0% 2-year loans. each time was with a different lender. our equipment dealer always has a bead on who is offering some kind of promotional financing deal, and it seems like there is always something similar to be had. and there are some companies who have the odd predilection for loaning money specifically for whizbang watchimacallits. knowing what i do now, i'd ask your equipment dealer about any promotional finance offers. if you're gonna borrow money, not sure how you could beat 0%.

flyin solo, post: 433465, member: 8089 wrote: if you're gonna borrow money, not sure how you could beat 0%.

As Lee indicated above, you beat 0% by getting a lower selling price. No one is giving away money.

well, of course. but assuming the OP isn't in a cash position then borrowing is borrowing. paying some miniscule "processing fee" (like 150 bucks) to save a few grand in interest...

if you can swing, say, 50K in cash for gear to get a crew going: good for you. not everyone is in that position. and personally, i didn't spend a lot of time haggling over price with the dealer after the first purchase (when i was shopping brands). i'd become a good customer, and though i likely could have gone and fished for lower prices elsewhere (and maybe gotten them), my desire to be fair to an established relationship precluded my need to go find a low-ball on gear.

and i'm speaking here in terms of a local shop who reps a couple different brands. we first worked out what gear we wanted, needed, etc. the financing is/was third party. if the dealer and the lender had some graft going on, it's between them. i got an invoice for the gear, signed the loan documents, and paid what i paid + sales tax + aforementioned processing fee.

I should make the following comments under a pseudonym but will throw caution to the wind.

I am going to list a bunch of thoughts below in no particular order. Please allow me to say "I am speaking in general terms, your specific situation may be different, this is not an offer and you should probably consult with your accountant." If you have questions, don't hesitate to call me. I will do my best to listen and answer your specific questions, I will say things on the phone that I would never put in writing. Especially here.

1. There are some very bad players in the equipment leasing business. Rates can be as high as 35% per year with terms that are crazy (like leases that automatically renew if not canceled prior to term in writing.) Typically leases are not a good deal. Some of the players (who I would love to mention by name but do not dare) are common criminals and no surveyor need associate with them.

2. Don't confuse leasing with EFA (Extended Finance Agreements.) EFA's on equipment can have amazing terms. They don't auto renew (or at least they should not) and you can pay them off early (although they are typically fully funded upfront so there may be little advantage to doing so.)

3. EFA's typically include a UCC filing on the SN's of the equipment which is good because it will establish a commercial line of credit for your business.

4. There is a 3.5% cost of using a credit card, the cost of an EFA on equipment purchased by a licensed surveyor is typically only a small incremental increase over a credit card. Unlike a credit card, an EFA offers the equipment dealer very little risk because the path to a fraudulent transaction is blocked by the underwriter. (In other words the dealer gets paid the day after delivery, no matter what.) The underwriter will run personal credit and establish a real-physical-delivery address which blocks a significant portion of fraudulent transactions.

5. The effective rate for most EFA's is typically around 5% today. This is a function of the general risk presented by the class of purchasers (Licensed PLS = Very Low Risk) and the track history of the retailer / vendor / manufacturer who is sponsoring the EFA. Typically there is a $100 to $200 document fee which is paid by the purchaser, to insure that they have at least a little skin in the transaction. Many EFA's are underwritten by the manufacturer and present NO additional cost to the retailer, and the retailer gets paid immediately with absolutely no risk. So in reality the retailer may offer a BETTER price if you do a EFA than if you use a credit card. Other than the Doc Fee, this really is 0% financing! The dealer can not get a better deal from the manufacturer if you don't finance and pay cash. On most equipment financing, the equipment itself is the collateral.

Also, it bears repeating that the rate is dependent on the track record of the vendor/retailer too.

In general most licensed surveyors will easily qualify for EFA on equipment. The common exceptions are medical bills for catastrophic care and tax liens.

6. Credit Cards represent a high risk to retailers because it is so easy to dispute charges. 100% of fraudulent survey equipment purchases involve credit cards or fake cashier checks. Most involve a fake address for a real company. Some are very difficult to tease out. I typically receive 3 requests per week which are fraudulent. The potential for loss with Credit Cards can not be underestimated.

7. Temper your assumptions of what drives dealers with these considerations: they hate accepting CASH (like $100 bills) for purchases over $5,000 because of banking regulations and essentially EVERY single transaction involving a cashier check is fraudulent. This leaves Wire Transfers (which are difficult for customers, company checks for established companies, EFA's and credit cards (which, again, have significant risk.)

8. If you pay with a company check, wire transfer or valid bank check at the time of purchase (or perhaps within 7 days) don't hesitate to ask the vendor for a 3% discount. Remember that if you pay with $100 bills, the dealer is going to have to break the money into chunks and deposit in separate accounts or hold it through multiple days. (Whatever they do, it is going to appear to be money laundering to their bank.) If you pay with cash the retailer won't feel like you are doing them a favor and probably will accept no discount.

8. EFA's will require named equipment insurance which is always a good thing. You must maintain named equipment insurance for the duration of the financing. This is a GOOD thing, not a bad thing. You should do it on all your equipment that you can not afford to write a check out this morning to replace. Especially your GPS and ROBOT. If they are stolen and you don't have insurance, you won't be able to rent because you DON"T HAVE INSURANCE.

9. If you choose to finance/lease you should purchase extended warranties that cover the payment period at the time of purchase (they will get wrapped into the finance agreement) so that you have a definite warranty program through the term of financing. There is nothing quite like continuing to pay for equipment that you can't afford to fix or that has been stolen without insurance coverage.

So the short story is to save money every month so you can replace all of your equipment every two years (I would say 4 years, but from my perspective 2 years is better.) And if this savings does not work out then a factory or dealer finance agreement can be attractive. Typically a lease is not attractive (but I suppose that there could be an exception.)

A high percentage of our general population has very little perception of the true costs of borrowing money. One must look at absolutely everything that is involved to get the true cost. Most are not adept at crunching numbers (unlike surveyors). Crunch those numbers...........

In my case, I can create a new loan for $50 by using real estate as the collateral when I am using a piece of real estate that is already on the bank's list of my collateral. The true interest rate is very low compared to most other types of loans. They don't need to know what I'm spending the money for other than to say business purposes, which is why I have my farm loans in the first place. There is no other costs involved beyond the $50 and the true interest rate for however long it takes to pay it off.

Thanks for the input everybody. I wouldn't consider leasing and even financing sticks in my craw.

It's an unfortunate downside to our profession that we're reliant on expensive equipment that depreciates so quickly. I sometimes wonder how the best balance can be struck: buying appropriate equipment and keeping it right up to the point where it would be costing you money in productivity.

A commercial fisherman might have a boat from the 1970s that's still going strong and, because of maintenance and upgrades, could be sold for about what he put into it. Contractors can tie up money in yellow iron with a life-cycle measured in decades. Too bad surveying equipment is such a bad place to park money!

Frozen, I have a SBA loan through a local bank from when I started my company. A couple things about the loan.

1 it took three months to set up.
2 The rate was prime plus 2%.
3 I called 8 "banks" to get the loan. Most wanted a business that had five years since opening.
4 they wanted to secure the loan through two methods. One, collateral (my house). Two a life insurance policy In the amount twice the value of the loan.

It is a good way to establish credit, but the hassle of the paperwork. Is a pain in the butt.

I have since leased one instrument and I tried to pay anything new in cash now.

One thing that I did not see in the feed.

Consult your accountant and see Which method would help you at the end of the year.

Just a couple thoughts.

Jim Frame, post: 433478, member: 10 wrote: As Lee indicated above, you beat 0% by getting a lower selling price. No one is giving away money.

No one? Well, maybe land surveyors?

When I began my business it was mostly running and marking new boundary between monuments already in place and/or title surveys of properties I had prior knowledge of and miles and miles of COE boundaries with a $200 instrument and a 100ft chain.

After 6mos of that I paid cash for a TS setup with prism and pole and tripod and began any available work that came my way.

When I needed GPS and an ATV or Truck or other expensive equipment, I simply went to my credit union and borrowed against what I had on deposit or financed thru the product maker when available.

90% of my equipment came from other surveyors thru EBay or personal connections.

When I need specialized equipment that I don't have, I will look into renting or hiring someone for a day or so that has that equipment.

If I can't pay cash for it I don't get it. There have been times we really could have used some equipment but didn't have the money so we wait. Competitors financed stuff and got the jobs and all seemed good till things slowed down and now they are out of business and we are still chugging along. My overhead is so low and I have zero debt personal or business and it doesn't really matter if we work or not. I do it because I enjoy it. Don't make yourself a slave to the bank.