Many small businesses fail due to a lack of resources rather than bad ideas, particularly financial challenges, according to the US Small Business Administration. When considering financing for equipment, ask if it's easing your cash flow or creating a hidden long-term burden.

The best way to make a sound business decision is to take your time and analyze the loan documents thoroughly before signing them. The article below explains the main things you should check when evaluating possible equipment financing.

1. Research Your Options

If you would like to have a complete understanding of eligibility requirements, lender comparisons, and the step-by-step process of obtaining equipment financing, look at a practical resource like Lendio for more information.

The information found therein will give you a good overall understanding of how various lenders structure their offers. You'll know what you can expect to see at each stage of the equipment financing process.

2. Look Beyond the Headline Rate

A lot of times, equipment financing agreements use factor rates instead of traditional interest rates. This can create confusion since lower factor rates give off the impression of lower costs.

What you need to focus on is the total repayment amount. Always ask the lender to give you a full repayment amount in writing and compare it to the amount you are borrowing.

A sign of potential problems with your lender's terms is the absence of an annual percentage rate (APR) or total interest costs/charges (TCC) in the contract. If much of the cost is left out, this typically means that the rate is higher than it may seem on the surface.

3. Review the Prepayment Provisions

It is common for borrowers to believe that paying off a loan early will result in lower interest costs. However, many loan agreements charge interest regardless of the time of payment.

Before entering into agreements, check if early payoff lowers interest or just shortens repayment without savings. Be cautious of prepayment penalties or restrictions, as they can lead to unnecessary costs, even if the business is thriving.

4. Research the Lien Structure

Most lenders will secure their loan with a lien, often filed under a Uniform Commercial Code (UCC) agreement. The primary question is how broad the lien is, and how it shall cover non-collateral items?  Ideally, the lender will only have a lien on the equipment being financed.

Problems arise when the lender takes a blanket lien on every asset of the company. By taking a blanket lien, lenders restrict your ability to obtain outside financing in the future, thereby reducing your degree of freedom in the marketplace.

5. Understand Your Personal Guarantee

Some equipment financing deals include a personal guarantee, which means you could be personally liable for a business's failure to meet its payment obligations. It is important to identify what type of guarantee you are providing.

Limited personal guarantees will have less impact on your personal finances than unlimited personal guarantees. You should understand what the guarantee covers to avoid unexpected liability. Warranty or term ambiguity is a warning sign to pause.

6. Look for Other Costs

A common mistake in equipment financing is viewing the financing amount as the total cost without considering additional expenses that can raise the effective cost. Requesting a complete breakdown of fees will help identify all transaction-related costs. Hidden costs can include:

• Loan origination fees

• Document preparation fee

• Equipment insurance fees

If you do not receive specific costs for each charge in your financing agreement, this is also a red flag in your transaction. Uncertainty of what is included in your cost estimate could lead to a large discrepancy between your original estimate and actual costs incurred.

7. Evaluate the Flexibility, Speed, and Tax Impact of Your Funding Solution.

Quick funding is essential for immediate equipment purchases. However, speed shouldn't happen at the expense of losing any degree of control over your business operations. Compare the time it will take to get your funds and the financial agreements with the lender.

When making an equipment purchase, consider the tax implications, such as potential deductions or depreciation benefits that can impact the financing value. If your lender can't provide guidance on these tax effects, you'll need to research them yourself.

Turn Knowledge Into Negotiating Power 

Equipment financing will either aid or detract from your development. This ultimately depends on the particulars of each situation. With the above tips, you can avoid common mistakes and make your experience seamless.

Having relevant information improves your negotiating position for better terms with a financing partner. A strong financing partner will be more than happy to answer any of your questions about their operation and provide precise information.