5 tips for financing your tech purchases
A major technology purchase can be an expensive and risky proposition for your business.
Many entrepreneurs pay for IT projects out of their everyday cash and then end up in a cash squeeze, especially if costs rise unexpectedly. Using a business loan can help avoid this risk.
“We see a lot of businesses getting into financial trouble after big IT purchases,” says BDC Senior Account Manager Christopher Brown. “Many technology investments can quickly increase in scope and cost, and all of a sudden, the company runs out of money and grinds to a halt unless the owner personally reinvests.” Brown offers these five tips for financing for your IT purchase.
1) Set a budget—First, prepare a budget for the purchase. Be sure to estimate the project’s total cost, including implementation, training, maintenance and updates. “People often overlook the total cost of ownership,” Brown says. “They only look at the sticker price, but the costs are always a lot more.”
Also, be sure to budget for any increase in business your IT project may generate. For example, a new website could spark significantly more sales. Those will, in turn, increase demand for raw materials, production and inventory. Meanwhile, cash inflows may lag your increased spending.
2) Match loan duration to asset lifespan—Seek a loan that has a payment period matching the lifespan of your new asset. You don’t want to still be paying off your loan when it’s time to replace the technology. For example, computer hardware typically lasts three to five years, so a term loan of the same duration would be appropriate.
3) Determine the appropriate type of financing—The type of asset you’re purchasing affects the kind of financing you will qualify for. Hardware purchases give you the most options because you can offer the asset as collateral for the loan. Options include an equipment term loan (with the hardware as collateral), a working capital term loan (for which collateral may or may not be required) or a line of credit (which is typically secured by your accounts receivable).
Software and digital marketing projects (such as creating a website) are usually harder to finance because there’s no asset to put up as collateral. You can finance these investments with a working capital loan or line of credit.
You can also lease tech equipment for your business through suppliers and some financial institutions.
4) Prepare before meeting your banker—Come well-prepared when you meet your banker to request a loan. Bring your financial statements, a budget for the tech purchase, your business plan, personal credit score and a credit bureau report on your company. It’s important to approach your banker for a loan well before you make the purchase, not when cash is tight.
5) Shop around—Generally, the more collateral you can offer, the lower your interest rate will be. But the rate is far from the whole story. You should shop around to different institutions for the best terms, including repayment options, required guarantees and the amount of financing available.