Most small business owners understand the way equipment financing works when it’s time to purchase new tools and machines. What many overlook is the opportunity for refinancing equipment they already own when they need working capital. This can fund upgrades and expansions without taking out a fresh loan on the new equipment, or it can take care of ongoing maintenance for your existing equipment so you do not need to tap into cash reserves to make repairs. There are two ways to use the equipment you own outright for capital. One of them is debt-based, and the other involves selling the equipment and leasing it back.
Refinancing Equipment with a Loan
Equipment financing works a lot like property financing, in that the value of the purchase serves as the collateral for a loan. That is why you can’t get more than the purchase value of your equipment out of a loan when you buy. In fact, it’s why you usually need a down payment. Just as you can refinance real estate to access the equity in it as working capital, you can do the same thing with equipment.
Most of the time, refinancing equipment involves pooling a few assets. Their value is based on the expected useful operating life remaining and their original values, and the LTV is lower than purchase loans. That being said, if you need money now, it is a way to access the capital you would otherwise be sitting on.
Using a Leaseback to Sell Equipment You’re Still Using
Another equipment financing option is the leaseback. This has a few advantages over refinancing with a loan when it is used under the right circumstances. If you are selling to someone looking to lease that equipment for investment income and you are also leasing it, you have a lot of negotiating power when it comes to costs and term lengths for the lease.
The best part is at the end of the lease. Having sold the equipment for working capital, all you need to do is let the lease expire and the investor will take care of its removal. That frees up floor space for your next equipment upgrade while saving you equipment disposal costs.
Why Use Equipment Financing for Working Capital?
There are a lot of ways to get access to capital when you need it, but financing your equipment is a way that helps you control your costs. Whether you choose a loan or a leaseback, the cost of capital is mitigated by the lowered risk that your assets’ values represent.