“Our clients already have credit cards, so why would we use an in-house financing platform?”
Sometimes we get variations on this sensible question from capital-equipment makers and distributors, so we’d like to give it the attention it deserves.
Businesses of all sizes and kinds have long used credit cards to fund equipment purchases. After all, they’re as close by, in theory, as your purse or pocket, and sometimes come with low introductory fees and the added attraction of points. Cards can also be a faster way to secure equipment than waiting for bank loans to clear — and if they come at higher interest rates than most other financing methods, that’s not likely to be a problem where cash flow is steady and plentiful.
Still, businesses that rely on cards to fund large equipment acquisitions are leaving on the table significant advantages that are inherent to financing purchases through a supplier’s in-house program. Here are the six biggest advantages.
1. Keeping other lines of credit free and clear
Tapping into an equipment provider’s financing means that other, often more expensive, lines of credit are ready for times when working capital may be in short supply. In fact, injudicious use of funding sources such as credit lines and bank loans can even create capital shortfalls. Imagine a business needs a piece of equipment but lacks the wherewithal to purchase it outright. They could apply for a term loan from a bank to fund the purchase of machinery they need. But what if there’s a business interruption, and servicing the loan becomes difficult? Or if a credit card is used, and business slows to the point where repayments get onerous?
“Slip-ups at such times could trigger higher rates, and still more difficulty staying current on debt,” says lending-technology pioneer Dmitry Voronenko, CEO of TurnKey Lender. “Where in-house financing is in play, a business that experiences a shortage of capital can then apply for a bank loan or use a credit card.” Meanwhile, with the financed equipment as the collateral for the financing, the business is free to collateralize other effects to secure additional loans if and as needed.
2. Getting out there with the finest equipment available
Servicing a capital-gear purchase with a credit card can make it harder to secure best-in-breed equipment. For businesses whose competitive edge is linked to using the best proven new technologies, upfront costs can be discouraging — to the point where some businesses in this predicament start using older gear that’s likelier to break down and takes longer to do its job. Simply, financing equipment through a manufacturer’s or distributor’s in-house offering — again with the collateral largely built-in — makes the newest proven tools and tech readily attainable.
3. Maximizing working-capital flow in spite of seasonality
To the extent businesses are vulnerable to seasonality, so is their cash flow vulnerable to depletion. Even where seasonality isn’t a yearly issue, almost every business experiences cash flow shortages from time to time, for one reason or another. At such times, equipment financing, with repayments coming in steady increments, can free your customers to deploy cash in support of other operating expenses.
4. Leveraging the tax code viz. interest payments on financing
The interest a business pays on a financing arrangement is tax-deductible. Where leasing arrangements are available, a business securing capital equipment may be able to deduct the entire lease payment as a business expense, not just the interest portion. Another tax benefit accrues from Section 179 of the IRS Tax Code, which may allow a business to deduct the full amount of a multi-year lease in the first year.
5. Applying for financing is simple and quick
Typically, the application for financing orders that cost up to $200,000 can be completed and — if green-lighted — funded in minutes where the supplier’s financing program is digitalized; a day or two otherwise.
“Financing decisions around these so-called small-ticket items typically come down to the type and value of the equipment in play, and the credit quality of the applicant,” says TurnKey Lender’s Voronenko. “Businesses with strong track records or whose principals have good credit standing can expect quick turnarounds on financing.” Orders valued higher than $200,000 the process can be more complicated, require more inputs from the applicant, and take up to a week to process — unless the financing platform is digitalized. In that case, the turnaround can be a matter, once again, of just a few minutes.
6. Benefiting from a digitalized financing environment
New technologies let equipment makers and distributors employ smarter credit scoring. Just as e-commerce has evolved to be more consumer-friendly, so has “lending tech” become much more dynamic in the last decade or so — just in time, in fact, for the restrictions imposed by the coronavirus pandemic, some quite likely to be permanent. In this equation, artificial intelligence functions as an adjunct, and a catalyst, to alternative scoring. Instead of relying mainly on FICO scores generated by credit bureaus and biographical data, financiers with the newest lending tech can tap into alternative scoring that leverages permission-based inputs around spending habits and social-media comportment to arrive at a fuller picture of your company’s ability to meet its obligations. New and established companies alike can get faster decisions — and quite likely better terms — from such alternative credit assessments.
“It’s hard to overstate the importance of fast, smart and dynamic scoring, processing, and servicing for companies in need of capital-equipment financing that promotes cash-flow consistency and leaves other financing sources available for true emergencies,” says Voronenko. “It’s what equipment suppliers and purchasers are starting to demand.”
Ready to start growing your business by offering affordable and easily accessible financing to your clients? Schedule a personalized TurnKey Lender demo today.