Companies across countless industries often face growth (or launch) strategies dependent on equipment that’s prohibitively expensive.
Overhead can create a real catch-22 scenario for middle-market and enterprise businesses. You need the equipment to make the money, but you need the money to get the equipment. As you know, that’s where the leasing and financing side of things come into play.
But how does it all work? Should you work with a broker or a direct lender, and what should you be looking for with these types of companies? These fundamentals are crucial to setting the stage for long-term success, and we’d like to share some of the things we’ve learned in our years in this industry.
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What kinds of companies need to finance or lease equipment?
The short answer: any business in need of equipment, heavy machinery, or technology that lacks the liquid capital to purchase them outright.
But no two companies are the same. There are taxes and balance sheets to consider, projected market growth, cash flow…you get it. We’ve learned over the years that the financials of these instances are never the same, and the best route is always what makes the most sense for you.
Who should you be talking to?
The success or failure of your next project may weigh in the balance of your next choice.
You have a few options in front of you. The obvious one is to approach your vendors directly. This certainly serves the “cut out the middleman” mentality well, but can be much more hectic.
A few reasons for this are:
- You may need to open multiple lines of credit with different vendors or related institutions. This can make payments pile up, as well as just create a logistics headache.
- In-house financing options can often be limited, and more expensive in the long run.
- You’re not creating a partnership that you can take advantage of long-term if you need investment capital again.
- Your soft costs may be unaccounted for.
If you want to own and keep the assets you’re investing in, but do not have diverse needs or plans for aggressive growth, this may well be the best route for you to go.
Otherwise, you’ll probably want to look at commercial finance companies. Single-source, direct lenders (like VFI) can prove extremely beneficial for a few reasons:
- You’re only managing one line of credit or loan account. This prevents minimum payments adding up to exorbitant monthly expenses and the accounting nightmare that comes with it.
- You get the professional expertise of people who deal exclusively with commercial finance portfolios and lending day in and day out.
- If you expand later on, you have a partnership in good standing with a company that has capital ready to deploy.
- It can be significantly easier to get rates at or near market prime.
What about brokers?
Brokers definitely have their place in the finance world, and finding one might make sense for you. Usually, it’s because a decision maker lacks the time, resources, or expertise to manage the financing side of things. The downside, of course, is that another party means another mouth to feed, so to speak. You can expect the cost of financing to go up when you include brokers.
Leasing Equipment vs. Collateralized Loans
Leasing is another option you might consider if you’re looking at investing in commercial equipment. As you probably know, leasing would come with monthly payments, the same as financing would, but with an option to buy the equipment at the end of the lease (with appreciation or depreciation factored in).
The obvious benefit is that you have the option to buy later without huge down payments or locking yourself into a long-term loan. You also have asset-based equity should you decide to buy your equipment at the end of the lease.
The problem with leasing, however, is cash flow. Once again, you run into the stacking payments and financial management side of things that can get very costly, especially if you don’t have liquid assets rolling in consistently.
What’s the next step?
VFI is a leader in equipment financing and leasing. If some of the options above sound like the right fit for you (or all of this is making your head spin), we’d love to talk to you about how we can help.