Business and Credit: How Can the Equity in Your Equipment Affect Your Financial Position?

OlufisayoJuly 3, 20180898 views

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Heavy equipment, such as construction vehicles, usually represent a significant investment.

Large investments like these typically mean that, after just a few years, substantial equity can build up. That’s usually about the time many new businesses look to aggressively expand. The capital needed to finance such expansion is sometimes right there in the company’s parking lot.

This post should give you some tips and information about how to build equity quickly and the benefits of tapping into it for needed capital. Additional resources are available at places like http://equifyllc.com/equifyfinancial/.

Building Equity in Your Equipment

To maximize borrowing ability, it’s necessary to maximize the equity in your equipment. This task may seem impossible, but it is probably easier than you think.

When you finance equipment, there is usually a notice that gives the total cost of the loan, including principal and interest. Some people assume that you pay these two things equally. That is not the way most loans are amortized. Instead, as a rule of thumb, borrowers pay mostly interest for the first third of the loan, interest and principle about equally for the second third, and mostly principle during the final third. In other words, the bank gets paid first.

As a side note, that’s why many loans come with a prepayment penalty. Such penalties are the bank’s way of getting most of its money even if you pay off the loan early.

To offset the amortization effect, add a few dollars to each payment. Over a few years, $75 or $100 a month becomes several thousands of dollars. Such additional equity significantly enhances your ability to borrow. Be sure you designate the addition money as a principal payment. Otherwise, the bank will probably keep the money as prepaid interest.

Benefits of a Secured Loan

First, the main drawback of a secured loan. If you default on the payments, the bank could seize the collateral. This risk is significant in feast-or-famine businesses. That being said, the benefits substantially outweigh the drawbacks.

Higher Loan Amount: The collateral means the bank assumes less risk. There is a presumption that the borrower will be more diligent in making payments if the borrower shares some additional risk. So, the bank may be willing to loan more money than it would otherwise, because the larger repayments are not as dicey.
Better Rate: For the same reason (less risk), secured loans often have much lower interest rates than unsecured loans. That’s definitely true in consumer loans. In 2018, credit card (unsecured) interest rates usually exceed 18 percent. But mortgage (secured) interest rates are usually about 6 percent.
Possible Tax Benefits: An accountant or tax professional can give you solid advice on this point. But generally, the interest payments on secured loans are tax-deductible, at least to some extent.

It is also easier to qualify for secured loans. That could be a significant plus for a relatively new business. There are other benefits as well, and a loan provider or broker can tell you all about them, as well as the risks involved.

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