Buying new equipment

While it is sometimes more financially prudent to lease business equipment than buy it outright there are circumstances that make buying equipment more advantageous to a company.

“With any equipment that has a useful life
longer than five years, it is generally better
to purchase,” says Frank Briggs, senior
vice president of business banking for
Plano-based ViewPoint Bank.

Smart Business spoke with Briggs about
the advantages of purchasing over leasing
and tips on applying for business equipment
loans.

What are some examples of equipment that
would be more advantageous to buy?

Longevity of equipment is what makes its
purchase advantageous, particularly if you
are looking for a business loan to finance
the purchase. Computers and telephone
systems, in particular, are simply not good
to purchase because chances are you will
need to replace this kind of equipment
within five years. The rule of thumb is that
a business should borrow money for long-term capital items used in the operation of
its business. A good example of this would
be a printing press, machine tools or even
shelving for inventory.

What other kinds of equipment can be purchased using a business equipment loan?

The purpose of a business equipment
loan is to purchase a piece of equipment
that will help the company do business and
will have equity at the end of the loan’s
term. There are many types of ‘equipment’
that fall under that category, including
medical equipment and office fixtures,
such as tables, chairs, bookcases, desks,
computers and phone systems, mowers,
trailers and hauling equipment. Many
financial organizations allow for 100 percent financing of this type of equipment.

What are the qualifying criteria for a business equipment loan?

The equipment needs to be deemed a
necessary asset that will benefit the business. The second criterion is the repayment history of the business principals and
a good pay history of business credit.
There also needs to be sufficient cash flow
to service the term debt. The last criterion
is that the equipment itself can be used as
a secondary source of repayment to secure
the loan.

Do certain types of equipment fall under 100
percent financing?

One hundred percent financing — up to a
$100,000 loan — is generally available for
capital equipment with a slow depreciation
curve, such as machinery. The typical loan
amounts range from $10,000 to $250,000
for a small business. The financial institution’s main concern is that a business will
be able to comfortably afford the loan payments and that the depreciation of the
equipment does not get ahead of the pay-down of the loan.

Is it easier or harder to get a business equipment loan than other types of business loans
or lines of credit?

It’s easier because the collateral is hard
collateral. The nature of these physical assets gives the financial institution a comfort level that is higher than, let’s say, a loan
secured by accounts receivable. Many
banks have an origination fee to protect
early payoff. Equipment is financed on a
fixed-rate basis; the greater the risk of the
borrower, the greater the rate.

Are there circumstances when a financial
institution will shy away from giving out a
business equipment loan?

Most financial institutions are very cautious about equipment that will create an
environmental hazard. There are also high-risk industries that banks are reluctant to
lend money to. Not that money is never
lent out to these industries; it is just that the
bank will look very carefully at the guarantor strength, or proven track record in a
particular industry.

What should business owners do if they are
declined a business equipment loan by a
financial institution?

They could try applying at another bank
or financial institution. But many rejections from reputable institutions could
mean that it is not advantageous either to
the bank or the client to take out the loan.
The guarantor strength may not be there,
or the equipment could depreciate faster
than the loan term. Whatever the case may
be, you want to work with a bank that
understands the clients’ needs and interest
and is not just pushing a questionable loan
through. This was the problem with all the
subprime loans. Sometimes a ‘no’ is really
doing a business a favor.

FRANK BRIGGS is the senior vice president of business banking for ViewPoint Bank (www.viewpointbank.com), which is headquartered in Plano, Texas. Reach Briggs at (972) 801-5729 or by
e-mail at [email protected].