Financing Capital Equipment
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Stringent lending requirements could make financing capital equipment a formidable challenge, especially in a volatile market. When stocks plummet, banks and conventional lenders are less inclined to loan money to businesses seeking to purchase or lease new equipment and machinery. For that reason, entrepreneurs seeking to start new enterprises may find funding fledgling ventures difficult. Financing startups is a high-risk undertaking to which not many banks and commercial lenders want to commit, especially in light of an uncertain fiscal future. And the fear is very real: most startups fail in the first three to five years, leaving lenders and borrowers up the proverbial creek without a paddle. In a sink-or-swim economy, no one wants to wind up high and dry. In the event of failure, owners and investors will certainly lose; and loans for which owners vowed to repay will go into default. "Better is it that thou shouldest not vow than that thou shouldest vow and not pay" (Ecclesiastes 5:5). But in spite of economic woes and stocks that take a nose dive, companies still have a need for capital expenditures. Corporations must keep up with consumer demand for high quality manufactured products; and in order to remain competitive, businesses must invest in improving existing operations. Updating machinery to keep pace with demand; purchasing new vehicles for corporate fleets; or installing computers, servers, and audiovisual aids are some valid reasons for seeking funding.
While businesses have needs, banks and other financial institutions may be reluctant to extend lines of credit and loans to fund capital improvements. Startups may find investment companies which specialize in financing capital equipment in exchange for limited ownership in a new venture. Companies which extend lines of credit to new enterprises, structured as a loan or lease, are crucial to getting the business off the ground. Capital expenditures can include PCs, servers, laptops, copiers, printers, and telecommunications devices. Office furnishings, company vehicles, trucks, and machinery are also included. General contractors may obtain venture loans or leases to purchase heavy equipment, such as backhoes, excavators, or front end loaders. Nearly any significant item used in the day-to-day operation of a business is considered capital equipment.
Owners of small and large corporations have the option of financing capital equipment over a long or short period of time. Venture funds which extend long-term loans may require that entrepreneurs use the machinery as collateral, but entrepreneurs retain ownership throughout the terms of the contract. Long term loans act as installment agreements; but buyers may have to make a final payment at the end of the term to hold a clear title to property. Conversely, financing capital equipment on a per-job or short-term basis may be best structured in a lease agreement. Leases require monthly payments plus interest; and entrepreneurs essentially rent computers, machinery, or tools for a shorter period of time. At the end of the lease agreement, lessees have the option of making one final buyout payment which transfers ownership, or new agreements may be drafted which extend rental terms. Businesses may also prefer to lease another piece of equipment, especially if the original item becomes outdated or upgrades are necessary due to a higher volume of usage or wear-and-tear.
There are pros and cons to financing capital equipment on a short-term venture lease versus a long-term loan. On the plus side, financing a loan for up to ten years enables new businesses a chance to get established and start making a profit. Venture capital companies which extend lines of credit for startups realize that building a new enterprise from the ground up takes time. They are not only willing to lend money for financing capital equipment, but as part owners, lenders will also provide limited management with an eye toward increasing productivity and profitability. Lending money and administrative oversight to a fledgling enterprise increases its chances of surviving the first three years when most new companies tend to fail. On the other hand, a short-term venture lease ensures that operating capital is not expended to make major equipment purchases. Owners can get in and out of a lease quickly without a major strain on operating funds. Flexible lines of credit enable businesses to purchase or lease machinery, computers, or furnishings over a limited period of time and stay in black. Long term loans also help companies control overhead while establishing a good payment history with lenders, as profit margins gradually increase.
In apply for financing capital equipment, startups need to develop an ironclad business plan which demonstrates how equipment or machinery will be utilized to make money. A demonstrated need, plus a detailed plan may be able to convince loan officers to relinquish funds to keep the company competitive. Owners also need to establish projections for future purchases and provide stock options to venture capital companies which serve as an incentive for funding. Investors should feel confident that lines of credit or leases will attribute towards a company's net profit and provide a good future return. Consulting with financial planners and accountants will enable new owners to develop a distinctive marketing plan; anticipate present and future expenses; and determine other sources of funding to offset short- or long-term leases or loans. Making a strong case for financing capital equipment and repaying loans and short-term leases prior to approaching venture capitalists will give lenders added assurance that owners have done their homework and are serious about honoring financial obligations.
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