Avoid These Common Equipment Financing Mistakes: A Guide for Startups

Avoid These Common Equipment Financing Mistakes A Guide for StartupsPhoto byCanva

For any business – small or large – equipment financing can be a lifesaver as it helps a company buy the necessary machinery without exhausting its cash reserve. It doesn’t matter what type of equipment you need: an HVAC unit, a kitchen oven for a restaurant, or a truck for a construction company. But like with any other funding product, finding the right plan is not easy and many startups make typical mistakes that can potentially ruin their financial health. But these blunders can be avoided if you know what to look for. So, explore some of the most common mistakes and how to avoid them so your company can get the right loan on the best terms.

1. Forgetting to Compare Prices for the Best Deal

In the search for the best equipment financing deal, entrepreneurs sometimes forget to compare prices and tend to rely on their banks to give them the best deals. But, both cases can prove to be very costly for businesses. Traditional banks have lower approval rates compared to private lending platforms where approval rates are as high as 70% along with a lengthier application process. Securing funding is a serious matter, so you must find the best terms and conditions to ensure that you get the exact amount you need and terms that will allow repayment to be an easier process. By exploring a mix of other vendors, particularly those specializing in equipment financing, you can find the funding of your dreams.

2. Ignoring the Fine Print

Read the fine print. Pronto. When it comes to money, particularly financing, you must read and understand the fine print on the contract and have a clear idea about what you are getting into. Many entrepreneurs barely read through the small print and rely on a third person (in most cases the salesperson) to take them through the terms and conditions. In some cases, they fail to understand the terms which might lead to legal issues down the line. So, go through each term on the agreement, understand them and if you don’t, get clarity till you are sure this is what you want. Don’t forget to double-check your document to ensure that it outlines all the initial cash requirements, monthly payments, loan duration, and end-of-term obligations. This might seem tedious, but it will save you a lot of trouble in the future.

3. Overlooking Total Cost of Ownership

While applying for funding, businesses tend to ignore the total cost of ownership in favor of paying the bills monthly. This may lead to cash flow problems and can put a strain on the financial health of the company. It is of utmost importance that you strike a balance between cost and cash flow by choosing a term length that suits your budget. This will prevent you from making excessive upfront financial sacrifices.

4. Not Considering Leasing as an Option

For businesses with tight or limited budgets, leasing equipment can be a good option instead of buying. With leasing, equipment can be used for a fixed period against affordable monthly payments. This can come in handy if the machinery you need right now is likely to be outdated shortly or if you want to use the funding for other business needs too.

5. Failing to Improve Credit Scores

Get ready to pay higher rates of interest and stringent loan terms if your business has poor credit scores. Before applying for funding, ensure your personal and business credit scores are good. Improving credit scores is easy. Just ensure you pay your bills regularly, have no overdue debts, and correct any errors on credit reports.

6. Underestimating Cash Flow Requirements

Inaccurate forecasting of cash flow requirements can lead to major financial strains for many enterprises. Don’t exaggerate the cash flow projection; keep it realistic for fixed and variable costs. You can keep your financial condition in check with regular forecasting and adjusting accordingly. This will help you to repay your equipment financing payment without any problem.

These are just a few problem areas where businesses tend to get stuck. Once you understand these points, you will be able to handle the complexities of equipment financing with confidence and avoid the pitfalls that many new startups encounter.