Working Capital vs. Equipment Financing: Choosing the Right Option for Your Business Needs
For many businesses, maintaining competitiveness and continuing to grow require continuing investment into new equipment and technologies. Acquiring these often requires money beyond what a business has on hand.
Nearly 8 out of 10 businesses use some form of financing when acquiring equipment, and options abound for what type of financing to pursue, each with clear benefits and advantages.
In this article, we’ll look specifically at small business financing options and, in particular, the benefits of two very common types, working capital loans and equipment financing. In exploring each, we will help you identify the right option for your situation and set you on the path to growing your business.
What is Working Capital?
Working capital is a short-term loan intended to cover the the daily operating expenses of a business. Regular operating expenses, including payroll, marketing, inventory, utilities, and rent, are all examples of expenses a working capital loan is well suited for.
Any number of factors can lead a business to seek short-term financing, from the need to leverage available cash towards inventory to address a big order to unexpected emergencies, or simply because of the nature of how and when revenue is generated. Approaching a working capital loan with a clear plan for repayment is a great way to ensure this type of financing helps your business move forward.
What is an Equipment Financing Loan?
Simply put, an equipment financing loan is one used to acquire equipment necessary for the operation of your business. Often this equipment is critical to the long-term success of the business, providing opportunities to increase efficiencies, tap new markets, and unlock the potential of your existing workforce and business model. An equipment financing loan can be a real catalyst for growth.
This type of financing can cover up to 100% of the cost of the equipment, enabling businesses to acquire critical pieces of equipment for rapid growth or to take advantage of a unique opportunity. Financing allows a business to spread out the cost of the equipment over time, meaning it can be placed into service, generating revenue while it is being paid off—essentially paying for itself as it goes.
Key Differences Between Working Capital and Equipment Financing Loan
While working capital and equipment financing are both very popular small business financing options, in practice they fulfill very distinct and different needs for a business.
Working capital loans serve the purpose of addressing a business’s immediate cashflow needs. Often considered critical for sustaining operations, these loans help tackle day-to-day expenses and opportunities. Equipment financing loans tend to be more strategic in nature. Earmarked for specific tools or technologies, these loans often add capabilities that will drive revenue growth and expansion in the future.
Working capital loans tend to be shorter in length because they address short-term needs like meeting payroll and acquiring inventory. Equipment financing loans often have longer repayment terms, from one year all the way up to 7 years (or more) in some cases.
Working capital loans are unsecured, meaning the borrower doesn’t need to put down any collateral. The lender determines creditworthiness on a case-by-case basis, often considering factors such as the duration of the business, annual revenue, and the personal credit score of the business principal(s). Equipment financing loans are asset-backed, which means the loan is secured by the specific piece of equipment being financed. In the case of default, that asset is the collateral, giving the lender the legal right to seize the equipment in order to recover their losses.
Interest rates vary between the two products as well, with the riskier nature of working capital leading to generally higher interest rates for that type of financing.
Pros and Cons of Working Capital Loans
Choosing a working capital loan makes a lot of sense for businesses seeking more flexibility with financing. Instead of being tied to a specific piece of equipment, working capital can be used for a number of business needs.
Applying is easy, requiring only a one-page application and the last 3 months of a business’ bank statements. Approval time for working capital loans is often quicker too, with same-day funding available in some cases.
Flexible, fast, and with a competitive rate, a working capital loan from Blue Bridge Financial can be the most efficient, hassle-free way to secure working capital. Start your application today.
A working capital loan might not be the most efficient financing vehicle for longer-term investments, including high-ticket machinery, property, or acquiring another business, due to shorter repayment periods and higher interest rates. Good news. Options abound for these needs. Start a conversation with a member of our team today to find your best fit.
Pros and Cons of Equipment Financing Loan
Being able to place a piece of equipment into service immediately while paying for it over time makes an equipment financing loan better for asset purchases. Spreading out the cost over months or years can preserve cash for day-to-day needs and can help your business remain more nimble and able to react to market conditions.
Generous loan limits, up to as much as $500,000, are available with equipment financing loans, and amounts up to $350,000 require only a simple app and no hard credit checks. Tax advantages, including Section 179 of the IRS tax code, can provide additional incentives to choose this type of financing for your business.
Equipment financing loans can only be used to purchase, lease, or repair equipment, meaning they cannot be used for other business needs (i.e. payroll, rent, or utilities) or for acquiring real estate. Additional options are available to address those needs. Learn more about these agreements and start your application.
How to Decide Which is Right for You
So how do you know which financing option is the right one for you? Which is the best loan for business growth? Which one is best to address your immediate needs?
Ask yourself these questions:
- What are my most pressing business needs?
- What are my business goals?
- What is the financial health of my business today?
- Are my needs short-term or long-term?
With these answers in hand, you’ll have a better idea of which option is right for you: a working capital loan or equipment financing. Let us customize a loan to meet the specific financing needs of your business. Contact us today!
Additional Resources
Looking for a deeper dive into the basics of equipment financing, including the differences between financing and leasing? Read more in our article on equipment financing basics.
Did you decide that a working capital loan is right for you? Learn more about strategies to optimize your working capital loan for your business in this article.
In addition, you can learn more about factor rates and APR in this article from our blog.
About Blue Bridge Financial
Blue Bridge Financial is a specialty equipment finance firm serving many different industries. If you need short-term financing to cover everyday business expenses, check out our working capital loan. Looking to finance a new equipment purchase with a manageable monthly payment? Check out our Equipment Financing Agreement (EFA). Get started with our easy application today or contact us with questions.
Frequently Asked Questions About Working Capital vs Equipment Financing Options
Evaluate your business’s immediate needs, long-term goals, repayment capacity, and whether the loan is for operational expenses or asset acquisition.
No, equipment financing loans are specifically for purchasing, leasing, or repairing business equipment. For other needs, consider working capital loans.
Equipment financing loans are asset-backed, meaning the equipment being financed serves as collateral. In case of default, the lender can seize the equipment.
Working capital loans generally have shorter repayment terms (months), while equipment financing loans often have terms ranging from 1 to 7 years or more.
Yes, working capital loans often assess recent bank statements, while equipment financing loans are asset-backed, making them accessible even for businesses with limited credit history.
