Did you know the construction industry in the U.S is one of the largest industries in the world? Valued at around 1,320 billion dollars, the construction industry is a lucrative one for prospective business owners.
If you have or are thinking about starting a construction company, you’ll need some heavy equipment. Unfortunately, equipment is expensive and will set you back several hundred thousand dollars. They can be hard to acquire, especially for small or medium-sized businesses with limited resources.
This is where getting heavy equipment loan becomes a viable option. However, you have to decide whether taking the loan is right for your business.
To help you decide, we have compiled the top pros and cons to consider when getting a heavy equipment loan for your construction business.
Pros of Heavy Equipment Loan
Below are the benefits of taking out a loan to buy heavy equipment for your construction business.
1. You Get Money to Buy Equipment
The biggest pro of getting a loan is you instantly access money to buy heavy equipment. You don’t have to worry about stalling business operations due to the lack of funding.
Most lenders have simple loan application processes. All you need is proof of business and ability to pay the loan. The application gets processed within a short period, and you gain access to the money.
Getting a loan is more viable than waiting to get cash for the equipment. It allows you to commence construction work immediately.
2. You Resolve Cashflow Issues
As aforementioned, heavy equipment is expensive. If you were to pay in cash, your business would probably sink to its knees. Small companies don’t have enough money to buy expensive machinery and still run daily operations.
This is where a loan becomes a viable option. You don’t have to worry about upsetting cashflow in your business. You only need a small amount for the downpayment of the loan.
After getting the loan, the total principal amount plus interest is spread across a predetermined period. You only pay a small percentage of the amount every month, and this will do little to affect cash flow in your firm.
Equipment financing is a great solution for small and medium-sized businesses that would suffer cash flow issues if they paid upfront for expensive machinery.
3. You Can Quickly Acquire the Equipment
After taking out a construction equipment loan and getting approved, you can purchase the equipment immediately. There’s no delay in the purchase process, and this allows you to commence construction activities as soon as possible.
As you apply for a loan, start looking around for potential equipment sellers. This way, you can cut down the amount of time spent researching once you get the money.
It is advisable to research first to know the approximate amount of money you need for the purchase. Doing this will prevent under- or over-pricing the equipment in your loan application.
4. There’s No Additional Collateral
Most types of loans require collateral before getting approved. Collateral is an asset which acts as surety or security for the loan. If you fail to pay up, the lender can seize the asset, sell it, and recover their money.
If you don’t have any asset that could act as collateral for the equipment loan, don’t worry. You don’t need one!
Heavy equipment loans don’t require additional collateral. The equipment you buy acts as collateral. Thus, should you fail to pay, your lender will take the machinery, sell it, and recover the loan balance.
5. You Enjoy Tax Deductions
Buying equipment allows you to enjoy tax deductions. According to Section 179 of the IRS tax code, companies can get deductions of up to the full cost of equipment that was purchased during the tax year in question. However, only the qualifying equipment can be deducted.
Some of the qualifying items include heavy equipment for business use. This means you can start enjoying tax deductions after the purchase and pay less in taxes.
The savings resulting from these deductions can go a long way in expanding business operations.
6. Loans Have Flexible Payment Terms
Another advantage of construction equipment loans is they have flexible terms. Depending on the value of the equipment, the loan repayment period can be between one and a few years. This is viable for small businesses as they may not be able to raise huge amounts of premiums for machinery loans.
Payment schemes vary from one lender to another. Some will ask for monthly payments while others offer quarterly, semi-annual, or annual ones.
Talk to your lender and figure out the most viable and flexible payment terms for you. However, don’t stretch the payment too far as you’ll have to pay more money at once.
7. Construction Business Operations Improve
Taking equipment loan allows businesses to acquire the equipment they cannot afford. Whether it’s large equipment like an excavator, grader, or bulldozer, or a small one such as a mini-excavator, tractor, or trencher, you’ll have you need to advance business operations.
You’re able to take up more construction projects without worrying about renting or leasing equipment, and this translates into more business for you. Taking out a loan improves business operations and leads to huge returns.
8. You Get Full Ownership of the Equipment
Unlike equipment leasing, taking a loan allows you to purchase the machinery. Thus, you get full ownership of the equipment. After repaying the loan, you can rent it out or sell and make money from it.
Also, you can modify equipment to suit individual needs. This is unlike renting where you should return the machinery in the condition it was in during acquisition. You’re charged for any damages or modifications done to the equipment during the rental period.
Cons of Heavy Equipment Loan
Here are the drawbacks of getting a construction equipment loan for your business.
1. Loan Usage Is Limited
One disadvantage of getting heavy equipment loan is you can only use it to purchase heavy equipment for your business. This includes things like the following:
You cannot use the loan to buy other types of equipment for your business. However, this shouldn’t be a problem if you only intend to buy machinery for your construction firm.
For other types of construction equipment, you can take out a different type of business loan to finance the purchases.
2. Doesn’t Make Sense for Short-Term Equipment Use
Taking a loan for buying construction equipment makes sense in the long-term. It is a viable option for businesses which intend to use the machinery for many years.
Thus, if you only need equipment for a short period, taking a loan may not be viable. In fact, you shouldn’t purchase heavy equipment if you just need it for one or a few projects.
In this case, it would be financially wise to lease or rent equipment for the required period. The rental cost is lower than what you’d pay for new machinery.
However, if you need to modify the machinery for your project, you can buy, use, and sell it later. Alternatively, you can also rent to other small construction businesses, recover the purchase cost, and make a profit.
3. Loans are Expensive in the Long Run
When taking a loan, the amount you’ll pay will be higher than what you’d have incurred if you made an upfront purchase. Equipment is costly; for example, an excavator can range anywhere between $100,000 and $200,000. Large excavators can cost as high as $1 million or more.
When you add interest to this amount, you can guess how much the machinery will have cost at the end of the repayment period.
Paying upfront for the equipment is the cheapest solution. However, if you aren’t able to raise the cash, taking a loan is the best alternative.
4. You’re Fully Responsible for the Equipment
Having full control over how you can use equipment is every contractor’s joy. However, this comes with some responsibility as well. You are entirely responsible for the equipment and its condition.
If any repairs are necessary, you are in charge of them. You also need to undertake regular servicing and professional maintenance to keep the equipment in excellent condition.
This is unlike a rental arrangement where the renting company takes care of servicing and maintenance. Thus, you end up spending a lot of money in the long run to maintain the machinery.
Should You Take Equipment Loan?
Now that you know the pros and cons of taking a heavy equipment loan, do you think it’s a good idea for your business? Should you consider it or go for other options such as leasing or renting?
The choice to take a loan depends on various factors and will vary from one business to another. Ask yourself the following before making the decision:
- Do you need the equipment for short-term or long-term projects?
- Does your business have the resources for an upfront purchase?
- Can you fix the equipment yourself or will you need help?
- Is the equipment tax deductible?
These questions help you determine whether getting a loan is a viable option. If it’s not, consider other options such as renting or leasing the equipment.
Tips for Taking the Loan
Once you’re ready to take the loan, follow these tips to get the best value from the lending process.
1. Work on Your Credit Rating
Lenders check your credit rating when deciding whether to approve your loan. Thus, if you have a good score, you increase the chances of getting the loan and at a low interest rate.
Check your credit report and if you have a bad credit score, follow these tips to improve it before applying for the loan:
- Pay off some of the short-term loans you have
- Decrease your credit utilization ratio
- Pay bills on time
- Create credit accounts with suppliers
If you don’t already have a business credit history, establish one. Let your business be a separate entity that can acquire credit. This way, your personal credit score will not affect the business’ ability to get a loan from lenders.
2. Research Various Lending Companies
Various financing institutions offer different interest rates for equipment loans. Thus, do your research so you can get the best loan prices in the market.
You can check online or ask for recommendations from other contractors in your area. Narrow down your selection to two or three companies, approach them for a quote, and thoroughly examine the contract terms.
Also, don’t shy away from asking for a lower interest rate, especially if you have a good credit score.
3. Negotiate Loan Terms
When taking out an equipment loan, get loan terms that work for your business. Don’t commit to monthly payments if your projects run for six months or more. You may find it hard to pay the loan on time, and this can result in penalties.
Negotiate for favorable terms with your lending company. For example, you can ask for quarterly or annual payments depending on your business cash flow. Also, check the fine print for flexible terms in case of late payment.
4. Choose New Over Used Equipment
Buying new equipment has numerous advantages. The machinery breaks down less often and is in excellent condition. As a result, you won’t incur huge costs of repairs at the start.
New equipment is also efficient, and it can significantly improve construction operations. However, it can be expensive to acquire.
If you opt for used machinery, ensure it’s no more than three years old. This way, you’ll avoid huge repair costs and regular breakdowns and downtime. Also, get a professional inspection and ask the seller to service and repair it before making the purchase.
5. Prepare a Large Downpayment
When getting a loan, it is advisable to have a large downpayment amount. The more the downpayment, the less the loan amount. Lenders are also willing to give you affordable interest rates if you pay more upfront for the equipment.
Strive to raise at least 30% or more of the total cost of the equipment. You’ll not only repay the loan within a short period but also pay less money in the end.
Ready to Buy Heavy Equipment for Your Business?
Are you ready to take out a heavy equipment loan for your construction business? Take note of these pros and cons and make an informed decision that will profit your business in the long run.
Do you need other types of business loans? Check out our blog to learn more about business financing and tips on how to apply and get approved for loans.