If you have outstanding loans on your business equipment, refinancing can help you improve cash flow, consolidate debt and streamline your operations.
Business equipment you own can be a valuable source of capital, worth a few thousand dollars to millions. When you own the equipment and its real value exceeds the amount you owe, it is equity that can fuel your business through working capital, refinancing, lowering payments and expansion.
Equipment refinancing, a new loan secured by equipment you own and used to replace or consolidate existing debt, can be a valuable opportunity to make sure you are getting the most value from the equity built into your capital equipment.
How does it work? When you have an outstanding loan, a new lender pays off the loan with the original lender, then creates a new loan obligation. This may result in lower payments and unlocking capital. You can even use the value of equipment that is not already loaned to secure working capital in your business - and sometimes this can be done as one deal.
Consider Refinancing a Business Equipment Loan
Many businesses, such as those in the waste industry, rely heavily on expensive revenue-generating equipment that can come with significant equity built in. Refinancing equipment can be a big benefit to cash flow and your operations for a number of reasons.
First, refinancing a business loan often results in a lower monthly payment, which can improve cash flow, most commonly by extending the loan term.
Second, you can refinance before a balloon payment comes due, replacing a lump sum payment with more manageable monthly payments.
The third reason you might want to consider refinancing a business equipment loan is if you want to buy out a lease. Typically, a lease will include an option to purchase the equipment by paying the residual at the end of the initial lease term, but many lessors will not finance this even after a series of on-time payments. By financing a new loan against your leased equipment, you can pay the residual and become the owner of that financed equipment.
Fourth, you can refinance for cash out. Machinery is a capital asset with equity to lend against regardless of whether it is paid off or financed. But you need a lender who understands the equipment and its value.
By borrowing against your equity in equipment, your business can gain working capital from the proceeds of the loan that can be used for a variety of uses including:
- Equipment purchases or improvements, including new equipment, raw materials, real estate, or building upgrades.
- Paying down other loans or obligations, such as taxes and lines of credit.
- Holding back a cash reserve for future financial needs.
Fifth, you can refinance to consolidate debt. Consolidation replaces multiple loans with a single, streamlined debt obligation with one monthly payment. In order to determine how much debt can be refinanced, a lender will consider the equity in your equipment.
If all your existing obligations are equipment loans, the lender will combine those loans, pay the original lenders and set you up with a single loan and single payment.
If your equipment loan situation is more complicated and includes other debts like merchant cash advances or business loans, then the lender will determine whether the equity in your equipment is sufficient to support the cash proceeds necessary to pay them off. If the equity is sufficient, the lender can offer a loan that includes enough cash to pay off those debt obligations.
Consolidating is particularly advantageous if the current loans are costly or restrictive, like high interest rates, merchant cash advance terms or loans that include balloon payments, and will simplify loan management.
With a single refinance, you can realize more than one of the benefits described above, but it is critical to know the equity in your equipment. That’s where a lender who understands your business and the value of your equipment can help you get the most out of your equipment.
Whether Refinancing Is Worthwhile
To determine whether refinancing is worthwhile for your business, consider the following steps.
- First, you need an idea of your equity, based on the actual market value of your equipment, not what it is worth on paper (in accounting, known as “book value” - the cost of the equipment less depreciation).
- Second, you can work with a lender to get an idea of what your monthly payment would be on a new loan refinance.
- Third, add up the monthly payments you currently pay on your debt.
- Fourth, you can subtract your estimated new monthly payment from the total of your current payments.
If this calculation produces a positive number, then refinancing likely makes sense in terms of helping cash flow in your business. To help you determine equipment value, loan terms and payments, you can consult with a seasoned lender.
Following Documents
A lender will need information about your needs and goals to make recommendations about what is best for you. To get started, you should have the following documents available.
To determine the actual value of your equipment, a lender will need a list of your equipment with makes, models and hours or mileage on it. They will also want to see a debt schedule with your current principal balances and monthly payments.
You also should have tax returns or financial statements available, as well as credit references and a business narrative that describes the history and future of your business.
Finally, you also should have a signed credit authorization and your company’s contact information.
Keep in mind that what equipment is eligible for a refinance loan will typically depend on the lender’s knowledge of the equipment. Some banks only make loans on new equipment and do not lend on used equipment or refinancing loans.
If you think you could benefit from refinancing your equipment loan, get in touch with a lender to find out how to get started.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
