Almost every new company that requires industrial equipment to function is struggling right now. Amidst global manufacturing shortages, the cost of machinery has skyrocketed. That is if you’re even able to get what you need. What can a fledgling business do about this without a huge well of capital at their disposal?
The reality is that only a small percentage of businesses ever buy their industrial equipment in cash. Heavy machinery has always been very expensive and is necessary from the outset. Businesses reliant on machinery cannot make money without it, and so they have to find other means of financing.
Equipment loans are very common sources of financing. In the current ecosystem, it is important to find financing as soon as possible. There is an industry-wide scarcity, caused by supply chain issues due to the pandemic, sanctions on Russia, inflation, and the convergence of numerous other global situations.
To prepare for financing the equipment your business needs, it is important to know what types of loans are available. The following 3 types of loans are the most common ways that businesses financing industrial equipment and heavy machinery.
1. SBA Loans
One of the struggles businesses face when trying to get loans is that they cannot guarantee the loan. They are restricted to applying for unsecured loans, leading to extremely high interest rates that could end up crippling the business. The Small Business Administration (SBA) helps businesses get approved for loans by guaranteeing them in part or in full.
Getting an SBA loan approved can be tricky, but it is well worth applying for one. With an SBA loan, you can get low interest rates without putting your assets on the line. Of course, this does not guarantee you success in your business venture, but it certainly oils the wheels.
To get approved for an SBA loan, you will need to meet a number of criteria. Only for-profit businesses operating in the US can apply, and you need to have invested your own time or money in your business. You must also have explored all other business loans at your disposal without success.
If you do get approval, the SBA will guarantee 85% of loans up to $150,000, and 75% of bigger loans.
SBA loans are not the only option for businesses looking for low interest rates. You can actually get secured loans using the same principles through which you’d get a car or home loan.
2. Secured Equipment Loans
To get a secured equipment loan, you can use the equipment as its own collateral. Since you will own the equipment from the get-go, it can count as security. As long as you do not miss payments, you will benefit from the great terms on the loan. However, if you do miss payments, the lender may repossess your equipment.
This is the most common form of funding for businesses requiring industrial equipment. The pressure is on, as losing your equipment would likely mean your business shutting down. But since you’re paying low interest rates and you are a low-risk lender, the chances that you will default on payment are relatively low.
What if you cannot use your equipment as its own collateral or do not want to risk it being repossessed? In that case, you can get an unsecured loan.
3. Unsecured Business Loans
Unsecured business loans are a form of financing in which the lender takes on all the risk. In order to mitigate that risk, they charge extremely high interest rates. This type of loan can be very attractive to people who do not want to risk losing their equipment. However, they are also very risky.
Most banks do not provide these kinds of unsecured loans due to the risk. There are stricter regulations around when they can approve loans and when they cannot, as some loans are considered potentially harmful to customers. It is generally private lenders under looser regulation who provide unsecured business loans with high interest rates. Some of these lenders use predatory practices.
If you’re confident that you will make more than enough money to make your monthly payments, you can consider getting an unsecured loan. But even then, it is not recommended. You will ultimately pay a lot more for the loan than what it is worth. You might also not be aware of some of the risks of taking out these kinds of loans.
If you truly are confident you will make the necessary money, you should go for a secured loan. After all, while losing your equipment is a risk, it is guaranteed that you will lose money on the interest of an unsecured loan.
Are there any other reliable ways to finance your heavy machinery? The best case scenario is that you can persuade an investor to give you the money to get your business off the ground. However, in order to do so, you will need to make a very compelling case as to why your business will succeed in today’s tough environment.
Of course, every new business owner should have confidence that they will succeed, but an investor will need more than just confidence. The reality is that unless you are opening a business with a groundbreaking concept, you will likely have to go with one of the three financing options mentioned above.
Start looking into financing options as soon as possible. With equipment scarce, it is important that you are able to buy what you need when it comes along.
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