How to build a successful equipment financing proposal
Financing a new piece of equipment out of your everyday cash can be a big burden on your cash flow and could even put your business at risk.
This is why bankers typically advise entrepreneurs to take out a loan for this type of big purchase. But how do you convince your banker to give you the equipment loan you need?
Trevor Fillo, Senior Account Manager with BDC in Edmonton, says that your lender will want to know how purchasing new equipment will impact your company. Will it increase your sales? Will it decrease your costs? Will it make you more productive?
“There has to be a tangible benefit, whether it is to produce more or the cost is less,” he says.
Buying equipment whether it’s for manufacturing, IT, trucks or a lumber mill, shouldn’t have a negative impact on your profitability, Fillo says.
He offers these tips to help entrepreneurs prepare a winning equipment loan proposal.
What kind of information does my bank need?
- Sales forecasts to show how an equipment purchase will impact revenue and profit.
- An explanation of how the equipment will increase sales or improve efficiency.
- Financial statements to show your company’s financial health.
Example of an equipment loan
ABC Inc. is applying for a $90,000 loan amortized over five years.
The company would be paying $1,500 in average monthly payments
Assuming an 8% interest rate on blended payments, then total monthly payments including interest would amount to $1,824.
You can calculate the hypothetical weekly payments on a loan using our free, online business loan calculator.
How will the bank make a decision?
Fillo says bankers will consider a variety of factors when deciding whether or not to give you a business loan. They will want to understand:
- the needs of your business
- the project for which the loan is required
- your business’s current financial situation
- your personal credit score
- your personal net worth
For larger loans of several million dollars, for example, the bank will go through your past and current financial statements. In the case of new clients, the bank will look at financial statements from the last three years. You should also have a written proposal to help the bank understand why you need the financing.
The lender will usually want to take the piece of equipment as collateral.
Be careful about your debt-to-equity ratio
Your debt-to-equity ratio measures how much debt your business is carrying as compared to the amount invested by its owners. Bankers watch this indicator closely as a measure of your overall leverage level.
When asking for a new loan, you should ensure you have a healthy debt-to-equity ratio and sufficient working capital. Fillo says he also looks at something called the fixed charge coverage ratio to make sure the company has the ability to repay the debt. Used together, these measures will show the financial strength of your company.
You can measure your debt-to-equity ratio using our online calculator or by using the following formula:
Negotiate your loan terms
Business owners can inquire about flexible repayments, loans that have limited personal risk, and terms and conditions that don’t change without due cause. For example, you might want to ask for seasonal repayment. This would allow you to reduce your payments during the low season and increase payments when you are bringing in more business.
“We’re here to find some common ground that we can both live with,” says Fillo. “Maybe they give a little and we give a little.”
3 common mistakes entrepreneurs make in their proposals
Fillo says entrepreneurs should be careful to avoid these three common mistakes when applying for a loan.
1. Not thinking about the long term use of the equipment
Fillo says entrepreneurs can overlook properly assessing their equipment needs over time.
“Whatever you are buying should fill the need today and in the future.”
Maximize the value of your equipment by thinking about how the new equipment will accommodate future growth, or whether it will help you stay ahead of your competitors in a changing marketplace.
2. Forgetting about downtime
Another common mistake is forgetting to factor in training and downtime when making a proposal to purchase equipment.
“The other thing that you have to ask yourself is do I know how to run this piece of equipment,” says Fillo.
3. Not understanding the numbers
Many entrepreneurs don’t know their financial numbers as well as they should. Every business owner should have a rudimentary understanding of how their financial statements work—how the income statement ties into the balance sheet, what is your cash flow statement, Fillo says.