When owning a business, it is of paramount importance that you comprehend the business’s operational mechanics. The dynamics of operations will greatly vary from business to business. If you are engaged in a manufacturing business, you will be required to adopt a capital-intensive strategy. If you are in a business that provides services, such as transportation, communication, consultancy, hospitality, education, medical, and entertainment, your business will require a mix of capital-intensive and labor-intensive strategies. Finally, when you are involved in trading goods and services or import and export, the strategy is fully labor-intensive.
Assuming you are a business owner of a manufacturing or service-oriented business, it is crucial to investigate equipment financing. For example, if you are involved in composite textile, you will need to have textile manufacturing equipment. You will be required to have spindles, weaving machines, thread machines, fiber-mixers, fabric printers, cutting machines, and many others. All these pieces of equipment are important to run a manufacturing unit of a composite textile mill.
The question, which arises, is how to purchase or get these arrays of different machinery units. The answer is twofold. First, if you have or a group of affluent business individuals can finance these machines’ purchase through their capital. The second option is to go for equipment financing through external sources, such as banks or financial institutions. Equipment financing can be of two types: loan or lease. However, this decision is not empirical because it is up to the financial controller, a viable option for preparing financial statements.
This is not all. To run the business operations (manufacturing or services), you will require more than produce-related machinery. With the advent of modernization, state-of-the-art gear equipment is required to improve productivity and reduce any losses. The associated equipment may include cars, heavy vehicles or rigs, computers, furniture, information-processing unit, and other office equipment. Survival or failure in the business is solely up to the owner’s understanding of the equipment’s importance.
Now coming back to acquiring the equipment, it can be financed through internal and external sources. It can be an expensive or cost-beneficial proposition. The onus lies on the shoulders of the decision-making authorities. Remember that equipment financing should be funded through long-term liabilities (long-term borrowings) or the company’s capital. It is a cardinal sin to avail short-term borrowing to purchase equipment, land, or machinery. This can create severe distortion on the balance sheet. Then the financial controller will require the help of external auditors or financial consultants for balance sheet restructuring.
Equipment Financing
Equipment financing is used to offer organizations the required capital (source of funds) for procuring various kinds of equipment needed for business operations. If you follow this approach meticulously, then there will not be an instance of balance sheet mismatch. The funds that your business has sourced will be directed straight in securing the acquisition of required capital equipment. If the equipment financing facility is availed through regulated financial institutions, the equipment will be collateralized as security. When the equipment financing facility is matured and timely payments are financially obliged, the bank will remove its title to ownership and transfer it to the company.
On the other hand, your business is not operating in ideal conditions if any unforeseen circumstances or economic turmoil. The bank reserves the right to liquidate the assets and recover the financed amount (and any other associated cost). In a way, the recourse will be not on the director’s wealth or assets. It would be directly associated with the equipment installed in the manufacturing unit.
Suppose the legal status of your business is a large-tier corporation and listed on the stock exchange. In that case, there are other possible avenues of equipment financing, such as the issuance of tokens (through initial coin offering), debentures, and quasi-equity instruments.
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