Drawbacks of Equipment Financing
There are various drawbacks to equipment financing or asset financing, depending on how your situation may change over time. Some of these are listed below:
Equipment financing contracts tend to be fixed term contracts. This means that it is generally not possible to end the contracts early and if you do so there will be penalty clauses imposed by the lender.
You will obviously incur interest charges in paying for the asset over a longer timescale versus making a single upfront payment, giving you a higher overall cost. However you need to calculate the total cost of ownership for the equipment funding including any tax benefits and the time value of money when comparing these approaches.
Interest rates for asset financing are generally set at fixed rates for the term of the agreement. This is great for budgeting as it gives you predictability. However, if interest rates drop significantly then you will be paying more than would be appropriate if you had financed your purchase at the later date when the interest rates had dropped. On the other hand, if interest rates were to shoot up then you would be protected from additional costs.
The finance company may require additional security over and above the asset itself, depending upon their assessment of the risks that they believe your company may pose when it comes to making the repayments.