1. Not accurately determining what you can comfortably afford.
When it comes to certain loans, such as a mortgage for a home, people tend to invest a good amount of time deciding what they actually can afford. When it comes to equipment loans, however, borrows tend to spend much less time on figuring out what they can actually afford. Since the term of the loan is shorter, most people think they’ll be fine with whatever they need and don’t take in to account how much extra money they really have to make a new monthly payment with. Before buying equipment, you need to really consider how much cash you can afford to put down for a down payment and pay each month for the loan term. To make your estimates more accurate, you should also think about how much additional revenue the new equipment will earn your company and factor that in to your budgeting plans.
2. Not balancing cash flows and costs
A very common decision made by business owners when looking for an equipment loan is to take the shortest term just to get the payments over with as soon as possible. What business owners don’t often consider is the burden this will put on their cash flows. Sure, selecting a shorter term will usually result in less total payback because you will only be accruing interest for a shorter period of time. However, by selecting a shorter term, the monthly payments will go up and can significantly impact your cash flows. On the contrary, if you select the longest term just to make your monthly payments the lowest as possible, you also have to consider how long the equipment will be making you money and how much it is actually worth to you. If you anticipate your equipment lasting about 4 years, you would generally be smarter to select a 4 year term on your equipment loan, as opposed to a 6 year term where you’re still paying interest for the equipment loan even after it’s obsolete. Balancing the costs of the loan and the impact it will have on cash flows is vitally important to making sure your company can stay in the green.
3. Not investigating all possible options
One of the most common things we hear at Harbour Capital when we are talking to prospective clients is, “I just use my local bank.” A lot of people feel this way because they have their personal checking accounts there and they’ve been there for years. Although the familiarity and friendliness is attractive, when it comes to a loan for your company, your local bank may not be the best place to go. It’s important to remember that business is business, and when it comes to getting money, you really do need to shop around a little. Finding different options in terms of down payment, term length, document fees, interest rates, and so on will help you choose which options are best for your situation. For example, here at Harbour Capital, we offer seasonal and deferred payments for some of our qualifying customers. This means that if you run an ice cream shop and you need to buy new ice cream machines, but you know business is really slow during Dec, Jan, and Feb, we will drop your payment down to low contact payment (usually around $100) so you aren’t shelling out a large sum of cash when you’re revenues are low. These are the kinds of things you should consider when deciding who to ultimately borrow money from.
4. Having unrealistic expectations
When applying for an equipment loan, it is important to know your credit history and credit score and do some research about what you should reasonably qualify for. If you know you have poor credit and some spotty payment history in the past, but you’re doing better now and seem to be on the right track, you should expect to get middle of the road interest rates and terms. Just because you have made a couple months of timely payments doesn’t mean you’ll get the best interest rate. You have to take into account everything on your credit report and understand that lenders are only trying to ensure they can cover the risk associated with lending the money.
5. Not knowing your lender
A loan application is a lot like a long-term relationship. You could be in this relationship for 7 years, so you must make sure you have a reliable contact at your lending company that you can talk to when you have any questions or concerns. You should ask your lender for references from previous clients so you can get a feel for how they’ve worked with people in the past. Any good lender will love to give you references because their references will just make you trust them more. If a lender is reluctant to give you references, this can be a bad indication that they don’t have many positive references to give out. Searching online for reviews is another way to feel out how the lender has treated it’s clients as well. One thing to keep in mind when looking online though is that people usually only go to the internet to post reviews when they’ve had negative experience, so just take whatever you find with a grain of salt.