Planning for the Future: How Equipment Loans Support Business Expansion

Business growth is a goal for most small business owners. To achieve that goal, you may need to increase your working capital and up your production capacity by purchasing new or updated equipment. That’s where equipment loans come in.

Addition Financial offers equipment financing loans to help our business members increase their productivity and achieve their business expansion objectives. It may not be obvious how getting a business equipment loan can support your growth goals, so we’ve created this guide to help you understand the benefits of buying equipment for business use with an equipment loan.

How does investing in new equipment help a business grow?

Business growth can rarely be attributed to one thing, but it is often associated with increased efficiency and productivity. When products can be manufactured more quickly and at a lower cost, or services can be provided at a lower expense, achieving expansion goals is something that becomes easy to accomplish.

Business equipment may help with business expansion in a variety of ways. Whether your business is upgrading your computers and office equipment, investing in software, buying manufacturing equipment or purchasing company vehicles to deliver products or provide services, the investment is something that can help your business to grow.

Here are some of the advantages of purchasing new equipment to help your business expand and grow:

  • Increased productivity. New or upgraded equipment can help you complete manufacturing and business processes more quickly than you did before.
  • Increased safety. Old or broken-down equipment may not be safe to use and can increase the risk of employee injuries, while new equipment makes for a safe workplace.
  • Better morale. Employees may feel more motivated when they have the most up-to-date equipment to use.
  • Less downtime. Older equipment is more likely to break down than new equipment, and that means you’ll have more time for production with new equipment.
  • Taking ownership. Buying equipment means you’re taking ownership of your processes and making a capital investment in your company. It can be better financially than leasing equipment.
  • Opportunities to compete. It can be difficult to compete with other businesses in your area if your equipment isn’t up to date; with new equipment, you can beat out your competitors and grow your business.

As you can see, purchasing new equipment is not just about upgrading the equipment you use. It can help you to grow your business by providing an array of tangible and intangible benefits that will allow you to put your expansion plan into action.

What are the benefits of using equipment loans instead of purchasing equipment for business expansion?

There are multiple equipment financing options available to owners of small and large businesses, but equipment loans have some benefits that make them the most advantageous option for many companies.

You’ll own your equipment

In most cases, the equipment you buy will serve as collateral for your equipment loan. That said, you’ll still be the owner of the equipment–something that wouldn’t be true if you were leasing instead of buying.

When you own equipment, you get tax advantages that we’ll talk about later. You also have full ownership of your business and manufacturing processes, something that can help you control costs and stay competitive.

Your cash flow can be controlled

Equipment loans are term loans, so monthly payments for an equipment loan must be incorporated into your budget. Overall, getting a loan is typically less harmful to your cash flow than buying equipment outright.

Since cash flow is the lifeblood of your business, it’s essential to do whatever you can to keep the money flowing and avoid shortages that may negatively impact your ability to serve your existing customers.

You’ll build your business credit

Debt isn’t bad for your business and it’s important to keep that in mind. While it’s not a good idea to borrow more than you can afford, carrying some installment debt can help you improve your business credit score.

The key is to make loan repayment a priority and stay on good terms with your business lender. Doing so will make it easy for you to get loans and other forms of business financing in the future.

You can access new technology

For small businesses, it can be difficult to get access to the newest and most powerful technology without help. Equipment loans can provide you with the money you need to take advantage of technological advances.

Without the right technology, you may find that you struggle to keep up with your competitors and achieve your growth goals. With it, you can become an industry leader and the company of choice for your target market. 

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What factors should a business consider when choosing an equipment loan?

Choosing an equipment loan doesn’t need to be complicated but it does require research and attention to detail. Before you apply for a loan or sign a loan agreement, here are some things you’ll need to consider:

  • The lender’s reputation. You should research all lenders you’re considering ahead of time, taking into account their online reviews and customer service.
  • Loan qualifications. The qualifications required to be approved for an equipment loan vary from lender to lender. The strictest requirements tend to come from banks, followed by credit unions and online lenders.
  • Interest rates and fees. While online lenders often have less stringent requirements than traditional lenders, these are offset by higher interest rates and higher fees. You’ll need to be sure you can afford your loan payments and fees.
  • Loan amount. In most cases, equipment loans range from a low of $5,000 to a high of $1,000,000. You should know how much money you need before you apply and have realistic expectations. You’re unlikely to get a $1m loan if you’ve just started your business or have inconsistent cash flow.
  • Loan term. Equipment loan terms typically range from three years to 10 years. With a shorter term, you’ll have fewer payments, but they’ll be higher than they would with a longer term. You’ll need to weigh your cash flow and other factors to decide which term makes sense for your needs.
  • Cash flow. Before you sign any loan agreement, be sure to review your cash flow and revamp your budget to include the proposed monthly loan payment. Getting an equipment loan can help you increase production and expand your business, but it can hurt you if you don’t have the cash on hand to make your monthly payments on time.

When you get an equipment loan, you’ll be taking on debt. That’s not necessarily a bad thing for your business, but you’ll need to be practical and understand the impact the monthly payments will have on your business before you proceed.

Are there any tax benefits or incentives available for businesses that finance equipment through loans?

Taking out a business equipment loan can help your business grow in more than one way. While the monthly loan payments must be added to your budget, there are two tax benefits you can take advantage of when you use capital equipment financing as part of your growth strategy.

Depreciation deduction

Depreciation is a tax advantage that allows businesses to recoup the lost value of equipment over time. You have the option of taking the full depreciation deduction in the year you purchase equipment or taking it over multiple years.

The rules around depreciation are complex. You can read about them here, and you may want to consult with a tax professional before you choose the depreciation method that’s best for you.

Interest deduction

The loan payments for your equipment financing are not tax deductible because the loan principal is considered taxable income. However, you can deduct some of the interest on your equipment loan as a business expense.

The Tax Cuts and Jobs Act of 2017 changed the rules around interest deductions. For 2023, the rule is that you may deduct interest as long as it does not exceed the sum of the following:

  1. Your business interest income for the taxable year;
  2. 30% of your adjusted taxable income (ATI) for the taxable year; and
  3. Your floor plan financing interest expense for the taxable year.

You can get complete details on the Internal Revenue Service website, here. You may want to discuss interest deductions with your business accountant before you claim the deduction on your tax return.

Tips to make the most of your business equipment loan

Here are a few tips to help you make the most of your equipment loan and use your new equipment to support your business expansion:

  • Make your loan payments on time. As soon as you know how much your monthly payment will be, update your budget to include it. Delinquency can hurt your business, so make on-time payments a priority.
  • Keep up with equipment maintenance. Maintaining your new equipment in good working order is a must. That means installing software updates as soon as they become available and performing all required maintenance.
  • Avoid new debt. When your goal is to grow your business, you’ll need to balance your cash flow and resources against your debt obligations.
  • Maximize efficiency. When you buy new equipment, take some time to review your manufacturing and business processes, document them and update them to improve your productivity and efficiency.
  • Take all available tax deductions related to your equipment. You may want to consult with a business tax professional to make sure you’re claiming all available deductions to reduce your tax liability.

Getting an equipment loan can help you make your business more efficient and more productive, allowing you to pursue your expansion goals and watch your business thrive.

Get affordable equipment financing to fuel your business expansion

Equipment loans can help your business get the money necessary to replace, upgrade or purchase new equipment to improve your productivity and outpace your competitors. The information we’ve provided here can help you evaluate your loan options and make the most of your equipment loan to fuel your business growth.

Do you need an affordable equipment loan for your business? Addition Financial is here to assist you! Click here to read about our equipment loans and begin the application process today.

The content provided here is not legal, tax, accounting, financial or investment advice. Please consult with legal, tax, accounting, financial or investment professionals based on your specific needs or questions you may have. We do not make any guarantees as to accuracy or completeness of this information, do not support any third-party companies, products, or services described here, and take no liability or legal obligations for your use of this information.