In March, we wrote about 2021’s top trends in equipment financing. To make the long story short, this year brings much to boost business owners’ confidence now and continuing throughout the year. As the economy shows signs of rebounding, small business owners are ramping back up and/or investing in equipment to meet growing demand. This is especially true in for medical, construction and manufacturing equipment.
Despite growing confidence, the lesson learned over the past year is still fresh in everyone’s mind. You really never know what can happen, so keeping a healthy amount of cash reserves on hand can mean the difference in your business surviving a downturn.
With a desire to invest in equipment and the need to keep sufficient cash reserves, business owners are taking a closer look at the financing options available today. There are several small business loan types, such as:
- Bank loans
- SBA (Small Business Association) loans
- Working capital loans
- Sale/Leaseback of equipment
Loans are never a one-size-fits-all proposition. Each type of small business loan is different, ranging from those best for start-ups, those with less-than-perfect credit and those who need short-term financing to financing equipment leases.
Historically low interest rates can make a bank loan sound like an excellent way to fund your business or an equipment purchase. If you qualify for a bank loan, you might score a lower interest rate than you would with any other type of loan.
This loan type may be perfect for you if:
- Your business is in an industry in which the bank is comfortable working
- You have a history of excellent credit
- You make a hefty down payment
- You have time to wait as you jump through application hoops and wait for approval
- You’re comfortable with a bank lien on your other assets
Of course, these conditions aren’t ideal for many business owners. And, sometimes, business owners don’t meet the bank’s requirements.
SBA Loans for Small Businesses
The Small Business Administration is a federal organization that serves as a resource for small business owners. One of the biggest benefits offered by the SBA is its low-cost, government-backed loan programs.
The SBA works with lenders like banks and nonprofits. A portion of the loans offered by the lenders are backed by the SBA, which translates to lower rates and better (and longer) terms for borrowers. For example, current interest rates for SBA loans in May 2021 being:
- 5.50% – 9.75% for SBA 7(a) loans
- Approximately 2.91% – 3.76% for SBA CDC/504 loans
- 3.75% for for-profit businesses and 2.75% for nonprofit businesses for EIDL loans for COVID relief
- 0% if forgiven; 1% if not forgiven for PPP loans
- 4.00% with no credit available elsewhere, or 8.00% with credit available elsewhere for other SBA disaster loans
Similar to bank loans, they require mountains of paperwork, usually involving business plans and multi-year projections. SBA loans are good options for business owners with a strong credit profile who are growing or expanding business, gaining working capital or refinancing debt.
Tempting, right? However, the entire process can last months and the majority of applications are denied due to bad credit, character issues, lacking collateral, insufficient revenue or capital to repay and inability to repay due to other outstanding loan payments.
Working Capital Loans
Investopedia defines a working capital loan as a loan that is taken to finance a company’s everyday operations. These loans are not used to buy long-term assets or investments and are, instead, used to provide the working capital that covers a company’s short-term operational needs.
While they can be a low- or medium- cost loan type, also they can be a very high-cost way to finance a small business. If you have good credit and profitability, loan rates are more reasonable. If you have credit blemishes or business losses, loan rates run much higher.
Sale/Leaseback of Equipment
If you’re familiar with how home equity loans work, then a sale/leaseback of equipment is the equivalent in the business world. This type of loan is an option if you own equipment assets like trucks, machinery or construction equipment.
The equipment is sold or leased, but retained for business use. Because the transaction is secured by the equipment, this loan type is relatively easy to qualify for, and it can be structured so that:
- You own the equipment at the end of the term
- All payments are tax-deductible
- Terms range from 24-60 months
What’s the Best Loan Type for Your Small Business?
Every business is unique, and there are small business loans that are best suit different situations. The advantage of working with Global Financial & Leasing Services (GFLS) is that as a direct funder, we can offer funding opportunities that a typical bank cannot. And, under certain circumstances, we can use our connections to numerous banks and institutions to provide our customers with the best financing solution that is available for their credit profile. In the end, our clients not only get the right financing for their needs, but also access to the funds faster.
READ MORE: GFLS Steps Up When Big Banks Don’t
Unlike big bank applications, our process is simple and streamlined so you have a decision often in 24 hours or less. Talk to one of our equipment lease financing experts at 480.478.7400 or start your application today.