One of the reasons that the customization business is so attractive is because it not only speaks to people’s creativity but is also comparatively inexpensive to get into, especially through equipment financing.
If you wanted to start a food truck business, you could expect to spend between $50,000 and $200,000. Plus, the various permits and licenses — not including the hassle of health certifications and inspections. Is dog grooming your dream job? A franchise will cost $40,000 to $150,000 depending on location – and the ongoing expenses you’ll incur are high.
On the other hand, a roll-to-roll direct-to-film printer might be under $20,000. And a good-quality commercial embroidery machine that’s suitable for a startup? Under $12,000.
Many entrepreneurs will tell you that their top two expenses are labor and equipment. And since many times the startup phase of a custom T-shirt business, for example, the owner supplies the labor, which makes your equipment costs/financing a pivot point.
Understanding equipment financing
There’s no mystery involved in understanding equipment financing. Because financing any object of value is much the same. For example, instead of paying for your house or car up front, most people take out a loan.
When you do, the house or car becomes collateral. And from then on, the financial relationship behind your purchase is between you and the lender. The criteria behind your approval, the deal you can get on terms and interest, or your decline depends on a few things.
What you’re financing matters
We all understand that financing a house often carries a lower interest rate than financing a car or that furniture on store credit.
Why? Because the potential value of real estate generally gets higher over the life of the loan while the car or furniture drops. And, of course, the bank always knows where your house is if it needs to collect that collateral.
Good credit, bad credit, or “meh”
Your credit score and history are a measurement, from a lender’s perspective, of your willingness and ability to pay back a loan. A low score means the lender’s money is more at risk, so it builds in a financial cushion to mitigate that risk in the form of a higher interest rate. That means your payment is higher.
They will also take into consideration things like how long you’ve been on your job and what your income is, which all goes into the final loan offer.
Putting money down
There’s really no difference between consumer and commercial loans in this case. Putting money down helps make it easier for you to get approved, regardless of your financial history, for several reasons:
- Reduces the lender’s risk – You have more equity in the equipment, and that equity means if you default on the loan, the bank is more likely to recapture the loan amount if you default.
- Reduces your payment – Can a lower payment make it easier to get approved for equipment financing? Yes! A lower impact on your cash flow means that it’s easier for you to make your payment. Again, that lowers the lender’s risk.
- Demonstrates financial stability – Just the fact that you have the funds available for a down payment demonstrates some fiscal responsibility. And that improves your odds of getting approved and getting a good rate/payment.
The commercial equipment difference
There are more similarities between consumer financing and commercial equipment loans than differences. Because these things, or a close variation, still matter:
Item to be financed
The item to be financed makes a difference. And typically for the same reasons that a house and car differ.
If you finance a 12-head commercial embroidery machine or a big direct-to-garment printer — that weighs 500 lbs and will definitely not fit in the back of your SUV — you might qualify for a lower rate. Because it holds its value pretty well, and it’s about as easily moved as your house!
But like a car or a big screen TV, for example, if you finance a white toner printer or 24″ vinyl cutter and decide not to make your payments, it would be much more difficult for the bank to go and get that collateral item.
So, the size and type of item for business equipment can have an impact on loan terms and rate, very much like a consumer loan. In commercial equipment financing, sometimes bigger can be better.
Your credit score and history
The best part of commercial equipment financing for your business is that it doesn’t rely on your personal credit score. It relies on your time in business and any credit you may have built up under the business name instead.
When you have two years in business, your approval will likely ride on your business’s performance rather than a personal history. This is not true anymore. Personal credit matters most times.
Commercial equipment financing has the added benefit of not even showing up on your personal credit too. Buying a new direct-to-film printer, in that case, won’t impact you getting a new SUV.
And even if you have not been in business for two years and you’re dealing with a finance broker instead of a consumer bank, pulling your credit won’t show up on a regular credit report. It’s about business!
- Important note: Be careful! Many equipment sellers and lenders may offer you — if you have less than stellar credit — a more consumer loan product. There’s nothing wrong with this because it’s usually offered to buyers that wouldn’t otherwise qualify for commercial financing. But it is different.
This is just the same as a consumer loan. When you put money down, you’re reducing the lender’s risk and that may get you approved when you otherwise wouldn’t be and/or a lower interest rate. Adds revolving debt
- Reduces the lender’s risk
- Reduces your payment so cashflow looks better
- Demonstrates financial stability
How to secure funding for equipment
If you are just getting started with your business, you’re probably going to be relying more on your personal credit and payment history than would for a more mature business.
That’s not to say that you won’t get a loan for your equipment, but the terms and conditions are far more likely to be based on your own creditworthiness.
But there are several strategies you can use to give yourself the best chance of approval either way:
1. Review your credit report
When you are talking to a bank is the last place you want to find out that a bill from years ago is still lingering or that you’ve got charges and late payment reports that don’t actually belong to you.
You can get your credit report for free from some providers, but you may want to get a jump on the entire process by dealing with a finance broker.
2. Review your personal finances
Evaluate up front if you can and how much you can afford if a down payment is required.
It’s also a good idea to create a personal financial statement. If you know how much you have coming in, where it all goes, and the equity you have in property or securities so you can paint a clear picture for potential lenders.
3. Have a backup plan
Just like in consumer financing, you may be offered conditional approval. That’s when the lender asks for a down payment or co-signer on the loan in order to reduce their risk and fund your purchase.
Decide how you would handle the request in advance. Is there someone that would co-sign? Can you come up with more money down? Could you get approved or a less expensive piece of equipment to get started?
Your bank vs. a finance broker
A good way to improve your chances of getting financed in almost every circumstance is going through an equipment finance broker. And the reasons are simple:
- Your bank will pull your consumer credit. It’s typical for especially a local bank to rely on your personal credit regardless of your business history.
- A finance broker can typically do a “soft pull” that gives you a very accurate idea of your potential for financing without it showing up on your consumer credit report.
- Your bank won’t shop your loan. When you go to your bank, they’re not going to call their competition and see if they can get you financed or see if you can qualify for better terms over there.
- An equipment finance broker will go to a large selection of financial institutions to see where you can get approved or just the best deal possible.
Starting or growing a customization business often depends on not only what equipment you add to your shop but what you pay for it monthly. Pay attention to this part of the process!