​What Is Equipment Financing?

 

 Equipment financing is the use of a loan or lease to purchase or borrow hard assets for your business, such as a company car or restaurant oven. There are multiple variations of equipment financing for specific types of businesses and equipment. With equipment financing, the asset you’re purchasing serves as collateral. If you default on your loan or lease, the lender can repossess the asset. Because of this, equipment financing tends to be a more cost-effective and lower-risk way to acquire equipment than other forms of financing.

 

When To Use Equipment Financing

 

Any business that utilizes physical equipment such as vehicles, computers, and machinery can make use of equipment financing.

 

Business owners commonly get equipment financing in these situations:

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You need expensive equipment but can’t afford to (or don’t want to) purchase that equipment upfront

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You need to replace your equipment frequently because it has a short lifespan, or you always need the latest in technology

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If your business is in a similar situation, equipment financing may be the right choice for your business.

 

  What Industries or Sectors Can Get Equipment Financing?

 

Knowing what equipment financing one thing is, and knowing if your business is eligible for it is another. This is especially important to understand because some business sectors are more capital-intensive than others and will require a more significant investment. For example, a restaurant might require large capital, but it cannot be compared to the finances needed to start or sustain a construction company.

 

Thankfully, equipment financing can be used in several business sectors or industries. Some of these include:

Agriculture

Construction

Healthcare

Restaurant or food service

Woodworking

Transportation

Oil field

Aircraft and crewless aerial vehicles like drones

IT companies

Energy

Essentially, if you are a:

Bar and pub business

Café and bakery business

Food service, delivery or restaurant business

Events and marquee business

Farming or Argo-centric business

Trucking, bus, car, or haulage business

Software or other IT-based business

Laundry and dry-cleaning business

Warehouse business

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Other companies that fall in the categories above

You may be eligible for equipment financing.

 

Types of Equipment Financing

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As with other loan programs, different equipment financing categories are different ways of funding a business’s equipment. If you are considering applying for business equipment financing, you have two primary financing options.

 

1. Equipment Leasing

 

According to the Equipment Leasing Association of America, more than 80% of American companies choose to lease some or all of their equipment instead of purchasing it. The term ‘leasing’ is often used interchangeably with ‘borrow’. In a way, you can think of equipment leasing as borrowing equipment from a lender.

 

Equipment leasing is a sought-after type of equipment finance, especially by businesses that do not have the means of purchasing equipment out of their working capital. It is also primarily an option for companies that are not viable or cannot be approved for getting equipment funding from a lender.

 

Equipment leasing is a type of financing where businesses rent equipment instead of purchasing them. In this case, the business leases the equipment from a lender who purchased it and put it up for ‘rent’. Instead of out rightly purchasing expensive equipment- which might be impossible at the business’s current financial position- you can lease the equipment and spread leasing payment over the next few months, years, or the duration of the leasing period.

 

Equipment leasing is an excellent equipment financing option for many reasons. Other than the financial benefits of leasing equipment, businesses also get to enjoy this equipment without having to worry about equipment depreciation or obsolescence.

 

Buying equipment and paying upfront is costly but maintaining the equipment throughout its lifetime is equally expensive. This is especially true if you work with equipment with a short lifespan of a few years before it becomes obsolete and is considered inferior. When this happens, a newer equipment version will be produced, and you will begin to worry about purchasing this newer version.

 

When you lease the equipment, you don’t have to worry about constantly getting a better upgrade by purchasing newer versions of your company’s equipment. Leased equipment is easier to scale as you can easily update your equipment at the end of your leasing term.

 

Additionally, leasing involves lower monthly payments that are usually spread over a few months or years. Although leasing equipment comes with additional charges like interest and other financial agreements, it is a cheaper alternative to making up-front payments for equipment.

 

How To Lease an Equipment

 

Leasing equipment is easy as long as you work with a legal lender. When considering an equipment leasing option, it is essential to ask yourself crucial questions that will help you determine if equipment leasing is the best option for your business. Some of these questions include:

 

What is your monthly budget?

 

You might not be able to afford a one-time payment for the equipment you need, but you should have a monthly budget that factors comfortably into your business expenses. You need to be sure that you can afford the monthly payment for the equipment without these payments adversely affecting other business expenses.

 

What’s your planned usage duration?

 

Unless you plan on leasing equipment forever- which is not cost-effective for any business- you need to plan how long you will be leasing equipment.

 

Can the equipment be leased?

 

Not all equipment can be leased. This is why it is crucial to research equipment leasing options before approaching any lender.

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How quickly will the equipment become outdated?

 

If your line of business involves working with equipment that is often becoming obsolete too fast, you need to ask yourself if purchasing or leasing will be the better option.

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Next, you need to find an equipment dealer or lessor that offers leasing services for the equipment you need. You can choose to work with a leasing company, an independent lessor, or a lease broker, depending on your preference and budget.

 

Afterward, you apply for the lease. Equipment leasing is not a loan, but it requires background checks on your company for the lessor’s safety. You will be required to submit several documents before the application begins.

 

The application process takes between 24 and 48 hours before approval is given. Subsequently, it will be necessary to review the lease plan and structure. You will be required to sign documents and follow up with the first payment in most cases. Lease terms resemble rental lease agreements, which may differ in many cases.

 

The lease terms will spell out your responsibilities—all of which you must agree with before the equipment is released.

 

Although lease durations and terms vary, the rule of thumb is that leased equipment is returned to the dealer at the end of the contract. This is known as an operating lease, as the business can use the equipment for a specific period without claiming ownership.

 

 2. Purchasing Equipment with Loan

 

Unlike leasing, equipment financing comes from a loan paid directly to the applicant. The loan proceeds are then used to purchase business equipment such as vehicles or printing machines.

 

Equipment financing is a type of loan that is split throughout installment payments. The amount to be repaid will include an interest percentage that varies with the loan amount, the lender’s terms, and the repayment period. This period can last anywhere from a few months to ten years or more.

 

As a form of security, the lender will request a lien for the equipment purchased using the loan. This will act as a form of collateral in case the business defaults on the payment terms and does not hold its end of the deal. In this case, the lender will gain full custody of all the equipment purchased.

 

Many lenders take it further by requesting liens on some business assets, taking these assets as collateral security. If the business fails to repay the loan, the lender will gain custody of these assets. However, if the business repays its loan without any problem, it gets custody of the equipment, and the liens are rendered dormant.

 

If you plan to apply for equipment financing, you must note that not all lenders or equipment vendors are the same and operate on the same terms. This is why it is vital to tread all agreements before going forward with the application process.

 

As with any other loan type, equipment finance often has general qualifications and specific eligibility requirements. These requirements range from annual revenue information to a credit score limit and up-to-date business history. Knowing this information will help the lender decide if your equipment financing application will be approved or not.

 

In addition to personal and business financial statements, lenders will request a detailed business plan and proposal for the future growth of the business. This will give the lender insight into the company’s operations.

 

Although terms vary- as we mentioned above- equipment financing money institutions rarely offer a 100% loan amount for the equipment purchase. Instead of providing the whole value, money lenders often offer 80% of the equipment’s value.

 

For example, if you applied for a $20,000 loan for equipment, the lender is more likely to offer $16,000 than it will be to offer the total. Added interest rates can range anywhere from 4% to 30%, depending on the lender.

 

Benefits of Equipment Financing

 

Getting the right equipment for your business can make the ultimate difference between growth and stagnation. Would you rather wait till you can afford that expensive state-of-the-art equipment at the detriment of your business or operations, or will you rather be able to afford it now and make the most out of your business?

 

Equipment finance offers an easy solution to afford big-ticket purchases without any delay. Some benefits of leveraging equipment financing include:

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*Being able to stick to a regular business budget. Equipment finance is often repaid as a monthly lease payment. This figure can be factored into the business budget, ensuring that all expenses are minimal and allowing the company to prepare accurate budgets over the next few months or years.

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*It allows a business to preserve a larger capital than it would have been if full payment for equipment was made upfront. With equipment financing, businesses can direct the cost of the equipment to other more important aspects of operations.

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*Equipment financing offers more financial convenience and flexibility.

 

*​Businesses will be able to purchase more essential equipment than they will without equipment financing.

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*Some equipment finances offset tax-deductible payments for tax relief (similar to Section 179).

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*Without worrying about obsolete equipment, businesses can focus on keeping up to date with the latest updates or technology.

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Equipment represents a significant investment for many companies. That's why, rather than tying up large amounts of cash to purchase needed equipment, small and large businesses often benefit from equipment financing. This route allows them to preserve cash, obtain the necessary equipment and align payments to the useful life of the assets.

 

Equipment financing is the process of getting a loan or lease to acquire business equipment. Organizations can use equipment financing to purchase almost anything their business needs, aside from real estate. They can use equipment financing to acquire company vehicles, technology, production equipment, office furniture and fixtures, medical equipment, build-out costs and many other items needed to run their companies.

 

"When businesses purchase new equipment, it often takes years to realize the full benefits of that upfront cost," said Mark Bearden, senior vice president at First American Equipment Finance, a subsidiary of City National Bank. "With equipment financing, business leaders can spread the costs over a period of time and better align the cost with the benefit of the equipment."

 

Equipment Loan vs Equipment Leasing

 

Equipment financing often comes in the form of an equipment loan or lease. While they may sound similar, there are some crucial differences between the two forms of financing.

 

For instance, while some lenders may offer equipment loans up to 100% of the value of the equipment, it's common for them to offer loans only up to a certain amount of an equipment's value.

 

For example, a lender may provide a loan for 80% of the equipment's cost. That means the borrower must provide a down payment of 20% of the cost of the equipment.

 

If you choose an equipment loan, you will need to make sure you can cover any required down payment, as well as make the monthly loan payments. When you have completed making your loan payments, you will own the equipment outright.

 

Equipment leasing differs from equipment lending in that you are not buying the equipment, so you don't have to come up with a cash down payment. Instead, the financing provider purchases the equipment that your business needs, and you make a monthly lease payment to use it. Leasing clients often benefit from lower monthly payments than loan clients, but they do not ever own the equipment themselves.

 

Advantages of leasing equipment include:

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*Paying less than the cash purchase price of equipment.

*Enabling predictable budgeting.

*Avoiding equipment obsolescence.

 

Leasing may be less expensive than getting a loan to purchase the equipment because the lessor invests what is known as a "residual position" in the equipment being leased. Many types of equipment, such as computers and vehicles, become outdated quickly. So, leasing offers the freedom to upgrade to new equipment regularly without making a large cash outlay. If you plan to update equipment regularly, make sure your lease term allows for that without incurring a penalty, and work to structure a lease term that coincides with your planned upgrades.

 

For businesses that decide to purchase the leased equipment, some leasing contracts offer a purchase option when the lease agreement is completed. If you want to lease equipment but eventually own it outright, make sure your lease agreement offers what is called a "fixed purchase" option.

 

Contracts for the end of a lease might include options for:

*Buying the equipment.

*Extending the lease.

*Ending the lease and returning the equipment.

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It's important to know what options are available for the end of your lease. Your lease agreement will contain these details. It is common for lease contracts to require notice of your election several months prior to the lease-end date. Other lease contracts could include return fees or limit the lessee's decisions about whether they choose to purchase, extend or return the equipment.

 

How Do Equipment Loans Work

 

Equipment loans are facilitated by a lender to provide equipment financing for the purchase of an asset for a business. You’ll have to submit a loan application (this is a standard process of collecting your personal and business information) to evaluate your eligibility for the requested loan. The overall process may vary among lenders:

 

Step 1: Submit a loan application. Some information requested will be about the type of equipment and financing you’re seeking, along with business history and personal and business financials. You may need to supply further documentation if sought by the lender.

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Step 2: Review the loan agreement. If approved, you’ll be presented with a loan agreement that defines the terms and conditions of the proposed loan. After disbursement, which usually takes one to three days, you’ll then be able to purchase the equipment, whether the loan funds are disbursed directly to you or the vendor.

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Step 3: Pledge collateral. The lender will use the equipment purchased as collateral to secure the loan and will file a lien against the asset. Usually, this is done via a Uniform Commercial Code (UCC) filing, which in the event of default allows the lender to seize possession of the asset.

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Step 4: Begin repayment of the loan. Loan payments will then be made for the term of the loan, which can typically range anywhere from two to five years. These payments are made monthly and are usually structured with a fixed interest rate. Once the loan has been repaid in full, the lien is removed by the lender and full ownership of the asset will be transferred to the borrower.

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For example, you could utilize an equipment loan if you are a startup business seeking furniture for your new office. With the help of an equipment loan, you could furnish the office with necessary desks, chairs, tables, and more. You could finance this purchase instead of paying out-of-pocket since a newer business likely lacks the capital to do so.

 

Rates & Terms of Equipment Loans

 

​Typical Equipment Loan

         Interest                                                   Generally ranges from 7% to 20%+

        Loan Amount                                      Depends on the lender and equipment type

       Collateral                                                 Asset acquired serves as collateral

       Repayment Period                                  Generally anywhere from 1 to 10 years

       Downpayment                                         0% to 20%

       Disbursement Time                                Usually 1 to 7 days

 

Equipment loans will be structured differently for each loan, depending on the lender and the type of equipment being financed. It’s not a one-size-fits-all type of loan, so be sure to shop around when looking for a loan provider.

 

Pros & Cons of Equipment Loans

 

        Pros                                                                               Cons

 

Can help you finance a large                                 May require a downpayment, 

purchase if you don't have the                              which can be costly depending      budget                                                                                 on the the asset

                                                                                                                                                                                                 

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Offers eventual ownership of assets                    May require you to pay more

purchased                                                                overall due to accumulated                                                                                              interest and fees

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Can provide opportunities to grow                     Limits loan funds to assistance     your business and fulfill operations                     in equipment-type purchases                                                             

                    

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WHO an Equipment Loan Is Right for?

 

Businesses in all industries are likely to have to use some form of equipment to perform operations.An equipment loan can benefit businesses of all shapes and sizes, especially those looking to finance a piece of equipment that they can eventually own and will last a long while.

 

 

You should consider an equipment loan if you:

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*Want to finance a large purchase: Instead of paying out of pocket for an asset, an equipment loan can provide you with longer repayment terms, usually with a favorable fixed interest rate that makes for easier monthly payments.

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*Don’t have the budget to purchase an asset out of pocket: If you are a new small or startup business, you may lack the resources necessary to make such a large investment. An equipment loan can bridge the gap and help build your business credit.

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Are acquiring equipment that will benefit your business: Equipment can be costly, so if you know that a piece of equipment will benefit your business and can still be utilized long-term, it may be worth the investment.

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Need equipment with a long useful life: A useful life calculates how long an asset can be profitably utilized. Since you will eventually assume ownership of the equipment purchased, you want to ensure it can still be used long after loan payoff and will not depreciate in value.

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Already own equipment and need collateral: If you are already in possession of an expensive piece of equipment and own it outright, you can use it as collateral to secure another loan.

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Qualifying for an Equipment Loan

 

Lender requirements will vary when it comes to qualifying for an equipment loan. While each may evaluate your application differently, there are a few common factors that they take into consideration:

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Credit score: Lenders will want to see a strong business credit score to show that you’re a responsible borrower with a history of making payments on time.

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Personal finances: In some cases, lenders may request a personal guarantee to supplement the collateral of the loan. They may ask for records of your personal income and check your credit score.

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Business finances: Along with your application, you’ll likely need to provide financial documents in regard to your business. These can include cash flow statements, tax returns, balance sheets, and profit and loss statements.

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Time in business: Continuing with the overall credibility of your business, lenders want to ensure your business operations have been profitable over time. They usually seek businesses that have been operating for six or more months, although this is not always a requirement.

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Value of equipment: Down payments are usually required for an equipment loan, and a lender may calculate what’s owed based on your creditworthiness and the price of the equipment. The standard down payment ranges anywhere from 0% to 20%.

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If you are a newer business or a business with bad credit, lenders may still be able to accommodate your loan request. This will likely result in a higher interest rate and the potential for various fees, such as late fees or a prepayment penalty, that can add up over time.

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SIMPLY REQUEST AN EQUIPMENT FINANCING APPLICATION TO GET STARTED