Businesses usually require different types of financing to meet their short term and long-term financing needs. Working capital financing is a type of loan procured by businesses to increase their inventory, meet their payroll needs and pay bills. This means that it’s meant for short term purposes. When a business wants to acquire assets, such as equipment or machinery, working capital financing may not be an option. In such cases, the business will have to procure loans online and Equipment Loans Online can help you with that. The key to financial stability in business lies in choosing the right loan and put it to the right use.
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Key Differences Between Equipment Loans and Working Capital Financing
i) Loan Amounts
One key difference between equipment loans and working capital financing is the loan limits for these loans. Usually equipment financing comes with higher loan limits than working capital loans. This is because it usually costs a lot of money to procure tangible assets, such as plant and machinery or vehicles. Since working capital loans are only used for non-asset related expenses, they usually come with a lower loan limit.
ii) Uses
Another difference between the two types of loans is the use. While equipment financing is only used to acquire tangible assets, working capital loans are only used for non-asset related expenses, such as payroll, increasing stock, overheads and paying utility bills among other types of expenses that are not related long-term assets.
iii) Collateral
Most long-term loans usually come with a security requirement. Therefore, borrowers have to provide some form of acceptable collateral to the lender. In many cases, the equipment being financed can serve as sufficient collateral for the loan. However, some lenders may demand additional collateral. While equipment financing requires collateral, working capital loans do not. The money advanced by the lender is based on the ability of the business to generate income. In other words, working capital loans are unsecured while equipment financing is secured.
iv) Down Payment Requirement
Most lenders usually require businesses to pay a small deposit towards the purchase of the equipment they require. For instance, they may demand a 10% down payment for equipment financing, but other lenders may demand a bigger down payment than this. On the other hand, working capital financing does not require any down payment. This is a major difference between these two types of financing.
v) Repayment Period
Due to the loan amounts involved, equipment financing usually comes with a longer repayment period than working capital loans. The ability of the borrower to service the loan within a given period usually affects the term of the loan. While most equipment financing come with a term of several years, working capital loans come with a shorter term of several months or a few years.
vi) Interest Rates
Since interest rates are usually a measure of risk, the rate of interest charged on equipment financing is usually lower than working capital loans because the loan is secured, so the risk to lenders is limited. Working capital financing is not secured, so the risk is greater. This means that borrowers have to pay a higher rate of interest.
Guide to Choosing the Best Business Financing
Whether you need equipment financing or working capital loans, it is crucial you consult a loans broker. This is because they have the resources needed to help clients find the best loan for their needs. The ideal broker should be licensed, insured and bonded. They should also have plenty of experience in the industry as well as a great reputation. The following tips will help you find the right loan:
Tip 1: Compare Interest Rates
When comparing loan products, the key factor of consideration is the interest rate charged. Rates usually differ from one lender to the next, so be sure to take your time to request quotes and do a comparison to identify the most affordable loans.
Tip 2: Compare Processing Fees
Most lenders usually charge a lot of upfront fees. This includes processing fees, negotiation fees, insurance premiums and many others. Be sure to check and compare all the fees charged by different lenders before making a decision. This will help you find the most affordable loan.
Tip 3: Processing Speed
You can do a comparison of the loan processing speeds of the different lenders because you may require funds urgently. The faster the processing speed, the better. Firms that guarantee 24-hour approval and disbursement of loans should be given preferential treatment.
Tip 4: Check Loan Terms and Conditions
Before choosing a loan, you must read the terms and conditions that come with the loan. You do not want to procure a loan without knowing the accompanying terms and conditions. After all, the loan may have hefty late payment penalties and the option for the lender to recall the principal loan on first default. Therefore, you must go through the loan T&C’s before you commit yourself.
You can save a lot of time and hustle by working with a loans broker as they have the time, resources and knowledge needed to help you find the best loan for your business financing needs.
