When it comes to equipment financing, there are many beneficial options from which to choose. Sometimes sorting through all of the different types of equipment financing programs can be difficult and confusing given the many questions that you need answers to before selecting:
- What if you are a seasonal business?
- What if your revenue fluctuates drastically throughout the year?
- What if you want higher capacity equipment now rather than waiting to upgrade?
- What if your business just requires a different kind of financing program?
All of that is certainly enough to make your head spin. When deciding to finance your equipment purchase, you need an equipment financing partner that will help guide you through all those options to make the process a little less complicated. Expertise matters.
Whether your business is just starting out, or you’ve been around the block a few times, flexible payment options are always viable.
Skip payment and step payment programs are two such options that are available in most cases. Both options may give you and your business needed flexibility in the way they differ from traditional financing loans. So what exactly are skip and step payment programs?
Skip Payment Program
A skip payment program differs from a traditional monthly loan because it permits payment reductions and abatements during times where your business typically slows down. Basically, you can choose to skip payments during certain months agreed upon in your lease terms. During these selected months, you can either opt to have no payment or a lower monthly payment to offset your other, more profitable months. The payments during the rest of the year would reflect the periods where your business normally enjoys an uptick in revenue. This conveniently offsets the few aforementioned months where you make either a lower payment or none at all.
Other forms of skip payment programs may include quarterly or semi-annual payment options. Though you, of course, still end up paying the same amount over the course of the year, the payments are simply spread out differently. Below are examples of forms of skip payments, which will vary depending on your loan amount and terms.
Skip Payment Example
| MONTH |
PAYMENT |
| Jan - Feb |
$0/month |
| March - Oct |
$675/month |
| Nov - Dec |
$0/month |
| Total Annual Payment |
$5,400/year |
Traditional Financing
| MONTH |
PAYMENT |
| Jan - Dec |
$450/month |
| Total Annual Payment |
$5,400/year |
Step Payment Program
A step payment program is typically either a step-up or step-down in your monthly payment amount after a specified period of time. A step-up payment structure means you will make smaller payments in the beginning of your loan for an assigned time period, with payments increasing over the life of your loan. Payments for this type of program are typically spread out over longer lease terms than traditional equipment loans. A step-down payment is the opposite of a step up program – your payments will start out higher at the onset of your loan and will taper off during the latter half. This type of structure may be useful when you (or your financing partner) require the lease to be paid down more quickly. Your step program may look a little something like this, depending on the amount and terms of your loan.
Step Down Payment Plan
| YR OF LOAN |
ANNUAL PAYMENT |
| 1 |
$11,500 |
| 2 |
$9,500 |
| 3 |
$7,500 |
| 4 |
$5,500 |
Step Up Payment Plan
| YR OF LOAN |
ANNUAL PAYMENT |
| 1 |
$5,500 |
| 2 |
$7,500/year |
| 3 |
$9,500 |
| 4 |
$11,500 |
Why would you opt for a Skip or Step Payment Program?
So now that you know all about what skip and step payments are, you might be wondering when or why you might want to opt for one. Both options appeal to different kinds of businesses and different kinds of industries.
Skip Payment Programs - Does your business see an uptick or lull in revenue throughout the year due to weather or tourism? Traditional, monthly equipment financing plans may not always suit your seasonal needs or make sense for the cash flow of your business. In such a situation, a skip payment plan might be a fantastic option for your business. For example, let’s say your own a tree trimming business. Depending on where you operate, you most likely see a bulk of your revenue during the spring and summer months when the weather is warmer. With a skip payment plan, you could choose to only make payments on your equipment during the months in which you make the most revenue, and not make payments when your equipment is getting less use. You will still pay the same amount on your loan over the course of the year, but the payments more closely reflect your cash flow.
Step Payment Programs - On the other hand, a step payment structure may be useful in situations where your equipment’s productive use ramps up over a period of time. This plan then allows the cash inflow associated with the use of your equipment to more closely match the cash outflow on the financing. Let your equipment make you money before you make significant payments! Let’s say you are just getting started in the decorated apparel industry and you need an embroidery machine. Financing one with a step program would allow you to make smaller monthly payments in the beginning of your loan in order to allow your business to ramp up. A step payment plan also allows you to afford larger equipment with a higher capacity right from the get-go, rather than waiting and having to upgrade at a later time. Instead of starting with a single-head embroiderer, you can purchase a two-, three-, even four-head embroiderer so you can hit the ground running rather than upgrading down the road.
Knowing the ins and outs of all the financing plans out there is half the battle. The more you know about the plans available to you and your business, the better off you will be when financing your next equipment purchase. Along with making sure you come armed with knowledge of the plans, it is also important to have a knowledgeable financing partner who will ensure that you get the plan that benefits you and your business the most.