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Equipment Financing
What is equipment financing?
The ability to run business operations without disruption is critical to your profitability. To ensure smooth operations, you need to invest in the best equipment. Whether you are investing in new equipment as part of an expansion move or you are replacing used equipment, this can be a high- budget endeavor to undertake. Instead of placing this kind of strain on your business’s cash flow, you can rely on an equipment financing loan. Equipment financing allows you to upgrade your production abilities without constraining your business’ financial prowess.
A business equipment loan is often the perfect solution for small businesses that do not wish to tie up their capital in immovable assets. This kind of loan also helps small and medium businesses acquire equipment that may be out of their financial reach otherwise.
Another type of Equipment Financing- Equipment Lease
Equipment financing lease is where you get the equipment you need but only for lease. The way it works is:
1. You identify the equipment you need and someone who is willing to lease it to you.
2. You agree upon a specific time period over which you can use the equipment
3. Over this period, you pay an agreed upon rent
4. At the end of the period, you return the equipment to the owner or buy it out on mutually agreed terms
While equipment leasing is an easier option for many business, it involves a steady outgo of cash without the acquisition of a capital asset. If there is no buyout at a depreciated rate at the end of the lease term, this could prove to be a costly affair for your business. However, if you plan to use the equipment only for a limited period, then leasing may be the better option.
How does Equipment Financing work?
Equipment financing is a loan used to purchase equipment that will be used in your business operations. As with other loans, you take the loan, repay it in instalments over a period of several months as agreed upon by you and the lender. The loan collateral is the equipment itself. Here’s how the process of obtaining business equipment financing works:
Step 1. The business owner identifies the equipment to be purchased. This equipment may be anything that is used in your business operations. For example, a publisher may need printing equipment, a bakery may need ovens, a clothing brand may need sewing machines.
Step 2. Determine the price of the equipment and finalize the loan amount you will require. A down payment of around 15% from your side is norm.
Step 3. Find out the prevailing interest rates for such loans. This may differ from lender to lender. Comparison shop to find the best rates in the market. Obtaining low-rate business credit hinges on several factors, your business credit scores being one of the critical ones. Good business credit score = more attractive small business financing options overall.
Step 4. Identify your lender and understand the terms and conditions of the loan thoroughly, with special attention to how the lender’s lien works upon the equipment you are set to purchase.
Step 5. Finalize your loan tenure, depending on how much your business can afford to pay each month. The lender may offer loan tenures ranging from 2 to 7 years. Keep in mind that the longer the loan tenure the large your loan cost thanks to paying interest for a longer duration.
Step 6. Wait for the loan application to be approved. Once approved, you can use the funds for equipment purchase. The lender has a lien over the new asset, meaning he can take it over if you fail to repay the loan.
Step 7. As with any other kind of credit, follow the repayment schedule you committed to until the loan is paid off in entirety. Once the loan is repaid in full, the lender’s lien over the asset comes to an end.
Who qualifies for Equipment Financing?
Lenders have several considerations factored in when they approve an equipment loan from a borrower, including:
- Your age: Typically, 21 years is the minimum age of applicants and 65 is maximum for any kind of business credit including this one.
- Credit score: As the applicant, your credit score makes a difference. You have better chances of loan approval if your credit scores are above 650- 700.
- The niche: The niche or industry your business is a part of is prime eligibility criteria considered by the lender. Some industries are deemed higher risk and a loan may be a tougher proposition for businesses in these niches.
- How long have you been in operation: A business that is well established is a better risk for lenders; a new business is a high risk. At least one year of operation makes you more eligible for any kind of business credit including equipment finance.
- Business earnings: The lender checks your earnings and repayment potential via your accounts statements and tax returns. Lenders have their minimum revenue criteria for giving loans but in general, revenues above $50,000 yearly make you a worthy borrower.
- Profitability and location: Depending on the lender, the following also may be eligibility criteria:
a) The business should have turned a profit for the past two or three years
b) The company’s location remained unchanged over the past two years
benefits of Equipment Financing
- Your business cash flow is not restricted by a large purchase
- You have capital left free to invest in other necessary expenses
- If the equipment is needed urgently and you do not have cash at the moment, your operations need not suffer if you opt for equipment purchase via an equipment financing loan
- The loan can be a cost friendly option since it is secured by a valuable asset- the equipment
- The loan helps your business expand, grow, upgrade itself to remain competitive despite your limited financial clout
disadvantages of Equipment Financing
- If you only need equipment to support a sudden demand spike or seasonal demand, a loan is an unnecessary, unviable financial burden on your business
- Adding up the interest, the cost of equipment is higher than if you can buy outright
- It imposes a steady outflow of cash on your business for a long term
- Failure to pay or delays in payment can harm your ability to get further business credit
What is an example of Equipment Financing?
Let’s take a fairly new bakery business as our example. Thanks to growing demand, the business needs to upgrade its production ability. It needs new ovens and refrigerators, apart from a commercial cooking range to improve its product range.
To obtain business equipment, the business needs $50,000. The business loan application is approved and a loan of 80% of the total equipment cost is granted. The business gets $40,000 as loan and has to put up $10,000 as down payment to purchase the equipment it needs. The loan tenure is 5 years and over these 5 years the lender has a lien over the assets purchased. At the end of tenure, if the loan has been repaid in full, the liens ends.
Key Points
Key Point 01
One time lump sum, paid down over time.
Use for expansion, capital improvements, and large purchases.
Key Point 02
Cash when you need it most
Use for recurring expenses, payroll, inventory replenishment
Key Point 03
One time lump sum, paid down over time.
Use for expansion, capital improvements, and large purchases.
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Frequently Asked Questions
Any equipment that is used in your business. For example:
- Industrial machinery
- Office devices/ appliances (laptop/ printer/ copier/ IT equipment)
- Tools pertaining to your business
- Needs for retail stores (shelves, stands)
- Agricultural machinery
- Commercial vehicles etc.
Yes, but the loan rates may be higher than what is offered to established businesses. Otherwise, you may have to make a larger down payment.
- Show a strong professionally made business plan
- Prove stable revenues with financial statements
- Give your personal guarantee if your credit score is excellent
It varies by lender but, in general, you may find equipment finance loans available with anywhere between a 6 and 18% interest rate. Established businesses with great credit scores and steady revenues get lower rates.
This depends on the loan amount but for smaller loans, the processing may be completed quickly within a couple of business days. Depending on the terms of your loan, the lender may directly pay your equipment supplier and not transfer the funds to your account when the equipment is delivered.
Brand new equipment as well as used equipment can be financed with these loans. However, the loan amount you can get and the approval both factor in the condition of the equipment and its resale value.
Usually, lenders do require that you make a down payment. However, depending on your business credentials, we may be willing to provide customized financing to support your equipment acquisition.