Entrepreneur Insight

Best Options for Financing Equipment to Grow Your Business

Buying, leasing, and other ways to fund new equipment for your business.

All businesses need the right equipment to ensure growth and productivity, and remain competitive. How to secure funding for the tools of your trade is an important financial decision, and while it may be time-consuming to find the right financing for your company, it doesn’t need to be difficult. While some companies purchase all of their equipment through loans, an alternative to outright purchase is an equipment lease. At the end of the day, taking out an “equipment loan or lease” or setting up an account for “equipment financing” is not dissimilar from taking out a mortgage for a home or a loan for a car, according to Mark Amoroso, first vice president and regional sales director of East West Equipment Finance.

“Typically, an equipment lease has a fixed payment over the lease term, but can also include step-up payments or low/high payments, especially if the cash flow for the business is seasonal,” Amoroso says, explaining that an equipment lease structure can provide benefits that may include:

• early buyout options,
• capped purchase options,
• and options to purchase or return the equipment at the end of the lease, or renew the lease for an extended term.

Payment plans for equipment financing often depends on the type of machinery being acquired and its “useful life,” Amoroso adds. Loans and leases can fall into a range of 36-84 months; sometimes with a longer amortization period (120 to 180 months), but this depends on the financial lender.

Should you lease or purchase?

The Equipment Leasing and Finance Association states that roughly 80 percent of U.S. companies are leasing equipment, but whether you lease or buy outright, obtaining the funds necessary is a process, and each company must know and understand its unique tax and accounting positions.

Working with banks is a common way to lease equipment. Some factors to consider when acquiring new equipment: how strong is your company’s credit? Just like any financing, a stronger financial position translates into better terms. How long will the machinery last and will the technology need to be upgraded on a regular basis? And will the equipment be acquired from different vendors, who are possibly in other countries? If so, a financier who has experience in a financial bridge is key.

How a manufacturer financed equipment for a new plant

When Giti Tire, whose headquarters are in Singapore, decided to open its first tire manufacturing plant in North America, the owners used several phases of bank financing to put its all-important heavy machinery into place. The new $560 million plant is now in production in Richburg, Chester County, South Carolina, and its tires will be sold in the North American market.

According to a recent article in Rubber & Plastics News, Giti Tire Manufacturing (USA) Ltd., in South Carolina will have 1,700 employees when it is working at capacity. The factory will make Dextero-brand and GT Radial-brand car tires. "The new plant in North America allows Giti Tire to service its dealers and customers better by bringing supply closer to the market, simplifying the supply chain, and responding faster to prevailing market conditions,” shares Kiky Krisnawan, director of Giti Tires (Canada).

What does a successful and long-standing company like Giti suggest to established business owners when it comes to acquiring equipment? “Based on our experience, we determined that it was best to utilize an operating lease together with a line of credit (LC) and trust receipt (TR),” says Krisnawan. “Most of the equipment purchased from foreign countries will require the LC and TR for shipment of the equipment. East West Bank was flexible enough to structure the operating lease to include such products as well as interim funding for payments due to suppliers prior to start of operating lease. It is beneficial and efficient to have a combination of these financial products under these arrangements.”

Research before applying for bank loan

If a company doesn’t invest in good equipment, it can ultimately cost thousands, if not more, to repair and replace failed machinery. It is wiser to do the legwork upfront to ensure the equipment is state-of-the-art and coming from reputable sources. Amoroso suggests company owners of any size do plenty of research on a few key points before applying for an equipment loan or lease: “When planning to finance or lease equipment, it helps to have the make, model and general description of the equipment you want, and for a bank, it helps for us to know how and where the equipment will be used, and to know its expected usage, such as miles per year, or hours per year.”

“A company should also give us three years of annual financial statements, plus a current interim financial statement,” he says. “The more information we have on the company and the equipment, the sharper our pencil becomes!”

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