Understanding the Benefits of Equipment Financing
July 31, 2021
Equipment financing is a key business tool used by many companies both large and small. Large companies often finance equipment to leverage working capital resources while also meeting monthly operational expenses. Small companies often finance on an as-needed basis to meet capital budget requirements. Equipment financing provides several key advantages to companies of all sizes over traditional cash buys of large ticket items like computers, building materials and other necessary equipment for your business. To discuss these advantages in detail we have combined a description of the advantages of equipment financing with an overview of its various methods including:
The primary advantage of equipment financing allows companies to hedge operational expenses against eventuality costs. By offering a temporary solution to long term cash flow problems it eliminates the need to obtain additional funding to address short-term cash flow problems. This method of funding also provides long term advantages by reducing your operating debt and increasing your capacity to raise equity. Over time this method of financing builds a strong balance sheet by leveraging your assets and reducing the need for outside financing.
This method of working capital financing is generally classified into two forms, working capital management and working capital investment. The majority of equipment financing is used for working capital management. As most business owners are aware, running a successful business requires an effective way to managing working capital. Equipment financing provides an alternative source of funding for your working capital needs, which can be used to address cash flow shortfalls and increase cash to operate the business. While this is one of the primary advantages of this type of business financing, there are other advantages as well.
Most equipment financing occurs for new purchasing or for upgrades to existing inventory. In either case, this financing provides cash immediately to help meet cash flow requirements. Many businesses use this strategy as the foundation for long-term success. With the ability to purchase additional equipment at any time, they have the ability to run very lean operating expenses. While this is not a guarantee that you will not need the additional funds, it provides a way to generate immediate revenue without having to tap into reserves.
Another advantage to equipment financing allows companies to lease or sell their property and then lease or sell the property itself in the future. This makes sense for businesses with only a few equipment pieces and allows them to pay down their debt over time. Using equipment financing allows companies to increase their liquidity quickly and easily. In many cases, financing is used to create an operating room to allow for expansion.
For any business, cash flow management is critical to ensure success. By using equipment financing, business owners can leverage their working capital so that they can make required payments on time. Instead of using credit cards or short-term loans from banks, working capital can be increased by simply borrowing money against the equity of the business. Once this equity has been developed through equipment purchases, it is easy to maintain a steady cash flow, especially when an emergency or opportunity arises.