It is to be noted that the loan amount will be lower or equivalent to the total cost of the equipment in the market. Hence, you can be relieved that you will not have to pay an amount that is much higher than the current market value of the equipment. Plus, the equipment piece will be fresh or brand new, unlike a leased product. Therefore, maintenance and repairs will be much lower.

Moreover, you will have to repay the loan amount with interest within the lifespan of the product. Once you are done with the repayment following every term and condition, you will get its ownership.

The Pros

• Easy to qualify.
• Relatively low cost.
• Does not require collateral.

Cons

• Require down payment in some cases.
• You will have to purchase the equipment.

Equipment Lease

When it comes to equipment lease, you cannot own an equipment piece by leasing it. Here, the owner of the equipment rents it out to others on a contract basis. Hence, you will not get complete ownership of the product outright in this case. However, at the end of your lease period, you can decide whether to terminate the lease, renew it, or purchase the equipment. There are mainly two types of leases; operating lease and capital lease.

Operating lease: This is one of the best leasing options available, since the monthly payments will be comparatively low in this case. Besides, the business owner will get a chance to own the rented piece of equipment at the end of the lease period. For this, all you have to do is to pay the current market value of the equipment. Unsurprisingly, this type of lease is also known as fair market value lease.

Capital lease: Unlike operating leases, capital leases impose higher monthly payments and are crafted more like business loans. Nevertheless, the business owner will get an option to buy the equipment piece at the end of the lease period either by paying 10% of its purchase value or a nominal value like $1. As a result of the structure of capital lease, it is sometimes indistinguishable from equipment finance.

The Pros

• No need of collateral or down payment.
• The application process is quite easy.
• Flexible terms and condition.
• Repairs will be on the lender.

Cons

• Lease amount can go higher than the product price.
• Lease amount will depend on your income, age, annual revenue, etc.
• The lease amount will be decided by the lending company.

In simple words, equipment finadncing will be like buying a house on EMI basis and equipment leasing will be like renting an apartment.

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In this case, your business enterprise can buy a piece of equipment from a lending company on a loan basis. Here, the equipment will act as your collateral. That is, you will get the complete ownership over the equipment once you repay the full loan amount to the lender on time. In other words, your equipment will buy for itself or you may repay the loan amount by making a profit using the equipment.

On the other hand, equipment leasing is a contractual plan. Here, you can rent an equipment piece from its owner for a certain period. The lease amount shall be paid at regular intervals until the expiration of the contract. However, you will not get ownership of the business equipment during the leasing period.

Even though both these options will be ideal for every business scale, these will be especially useful for startups and low-budget firms. Furthermore, you can consider these options when you plan to expand your establishment on a budget. The type of equipment piece that you can finance or lease includes machinery, furniture pieces, computers, printers, company cars, kitchen appliances, HVAC units, etc. This, however, depends on the type and overall turnover of your business.

Usually, it will be really challenging or impossible for a small startup to finance all above-mentioned factors altogether using their own capital. This is when most people think about equipment finance and equipment lease since both options let you acquire your business equipment instantly. Still, both these options are structured in different ways. While the former is similar to business loans, the latter is more like a rental agreement. It is quite natural for you to get confused when it comes to choosing the right option. In order to help you out of this dilemma, a quick comparison between equipment finance and lease is given below.

Equipment Finance

As mentioned earlier, you will get the opportunity to own an equipment piece right away even if you do not have a budget to afford it by means of equipment financing. Here, a lending company will back you with the cash to purchase your desired business equipment piece and you can repay it on a periodical basis. The total value of your loan, as well as the repayment period, will depend on the type of equipment you are purchasing.

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Use of Equipment Financing

Equipment financing is a lease or a loan used to buy assets for a business. This covers all kinds of assets including a vehicle or an additional instrument. Usually, businesses acquire equipment financing through different financing solutions, and in the following situations.

• When they need slightly expensive equipment but are unable to afford it, as it needs to be paid for up-front.
• When they need to change their equipment regularly because it has a very short span of operation, or if they need to keep themselves on par with the latest technology.

Considering these situations, it might sometimes be right to say that equipment financing is the right option for your business. There are two different types of it: equipment leasing and equipment loaning. These two things help you achieve the same goal but have differences in the methods followed to achieve them. Below is a discussion regarding the two.

Equipment Loans

An equipment loan is a loan acquired out of the need to purchase equipment. Usually, the equipment loan is secured by placing the equipment itself as collateral. This means that in the case of an inability to repay the loan amount, the equipment would be seized or sold by the lender.

This suits business owners who are looking to purchase equipment for long-period use, but are unable to pay for it at the beginning. Lenders may be willing to pay you the major portion of the capital needed, and you would then have to repay them periodically and in installments. There are a few things you need to be wary of here. Such loans provide you only 80% – 90% of the expense, and you are left to cover the remaining. Furthermore, this would cost you more on the overall than the original amount borrowed.

Equipment Lease

Equipment Leasing is a good choice if you need to trade your equipment often, or if you cannot afford the full capital needed to pay back a loan. In this method, instead of borrowing money to buy equipment, you pay a fee to borrow equipment. Therefore, technically, the leasing company (lessor) is the owner of the equipment but allows you to use it.

Equipment financing is the best option for businesses looking to purchase equipment but unable to afford them in the near future. The above are the two types of equipment financing available, which you should choose between after careful consideration.

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How Do Equipment Loans Work?

A bank or a financial services company issues this type of loan to customers in order to help them fund a portion of their equipment’s purchase cost. Such a loan is taken used by a small business that is looking to retain cash by spreading out such expenses over several months.

What about Collateral?

Put simply, collateral is something which a borrower pledges as security for a loan’s repayment; if they fail to pay back this loan, then their lender of choice will seize the collateral. The same principle works in equipment financing as well, but here the purchased equipment itself acts as the collateral. In other words, a borrower does not have to put up anything else in that stead. Like in any other form of secured funding, here, your lender would take the equipment back in case you fail to repay the equipment loan.

What Can You Buy with an Equipment Loan?

An equipment loan is used to make big purchases of assets that are likely to retain their value over time. These physical assets include the following.

• Large automobiles, such as semi trucks.
• Manufacturing equipment (for example, laser cutting machines, plate rolling machines, band saws, and so on).
• Big commercial printers.
• Farm equipment, such as tractors.
• Healthcare equipment (for instance, diagnostic machines, infusion pumps, X-ray machines, and so forth).
• Large construction vehicles as well as equipment (for example, mixer trucks, skid steers, cranes, etc).
• Computer servers.
• Restaurant equipment, such as ovens and ranges.

Other Facts to Know about Equipment Loans

A loan of this type requires less documentation in relation to several other forms of funding (such as an SBA loan, to name one), and you can usually get funded in under a week’s time. Interest rates on this usually fall between 6% and 9%. A small business owner who has a better credit score, as well as larger down payments, could get relatively lower interest rates. A borrower with a lower credit score as well as less cash to put down would see higher rates.

The usual term of repayment for a “non-SBA” loan of this sort is 1 to 5 years, but that can extend up to 10 years depending on the size of the equipment purchased, as well as its shelf life.

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Note that lenders would have different requirements from equipment loan seekers. The following are just general qualifications which a lender will look for when they make a credit decision. Still, underwriting standards differ and should be vetted prior to selecting a lender in order to make sure that as a client, you can meet the minimum requirements they have from you.

Personal credit is an important factor in getting a loan of this kind. If you are not sure of your present credit score, then you can find that out from an online service specifically meant for this. The higher the credit score you carry, the better your chances will be of getting approval quickly and easily, and also, the better the terms you can expect.

Besides the score itself, some lenders will insist on your business plan which describes what you are about, as well as a comprehensive proposal for pursuing growth. The elementary aim here is to provide a prospective lender with your business’s detailed summary. The years you have been in business, as well as your annual revenue, are significant factors to include in this plan. Some lenders would also place threshold requirements, such as you having been in business at least 24 months, and annual revenue of more than 250,000 dollars.

Beyond the revenue statement in your business plan, as well as your profit and loss (P&L) statement, lenders’ applications might just necessitate a cash flow statement or balance sheet. These statements should identify the expenses going out of your business, and the revenue which comes into it. These help the lender assess your financial strength. Because lenders are also interested in approaching small business owners’ personal finances, statements related to that need to be prepared as well. Preparation of pertinent loan application documentation is also essential to helping speed things up. It is advisable to hire a qualified accountant in advance of the process of loan application, in order to make sure all your finances are in proper order.

Equipment Financing Providers

There are many options in the market for getting equipment financing. You can obtain equipment loans from sources that range from traditional to online lenders. It is said that traditional lenders usually have more stringent underwriting requirements, but relatively better terms and rates. They might be suitable for an established business with strong working capital and assets. A specialized online lender tends to have more flexible underwriting requirements in place. However, the terms and rates might be less favorable in some cases. An online lender is relatively more suitable to a startup or a business that does not meet the minimum asset and credit requirements of a nationwide lender. The option that you go for will depend on your business’s qualifications and the type of loan which best suits your requirements.

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How Does it Work?

Equipment financing is a form of loan used to buy a physical asset such as an oven, a copier scanner, or a vehicle. Such loans carry the option of periodic repayment covering both principal and interest over a set term. A loan provider may necessitate a lien on an equipment unit/asset as collateral against debt. After the customer has paid off the loan in full, they completely own the asset, which is then free of any sort of lien. An equipment loan has a structure that may impose a lien on additional assets or necessitate a personal guarantee. Failure to pay off a loan might lead to repossession of that business asset or even personal assets, especially in cases where the borrower has made a personal guarantee at the beginning. Because of that, it is vital to look into the terms of the loan in order to understand the risks therein.

For instance, if one is starting a restaurant, he or she will need a considerable amount of equipment, covering a commercial range, a refrigerator, and ovens. For example’s sake, let us assume the total cost to be 75,000 dollars. A customer applies and is approved for a loan to buy an equipment unit, which is equal to 80% of the cost, or 61,500 dollars. That means their out-of-pocket costs would be 13,500 dollars, and they can hold 61,500 in their cash reserves in order to offset all other expenses related to a new business, including the cost of physical space, advertising, marketing, permits, as well as licenses.

This form of financing is different from equipment leasing, in which one pays the equipment owner periodic rent for its use over an agreed-on time period. After the leasing term, except if they agree with its owner on a buyout or renewal terms, the asset is returned to its rightful owner. Usually, the qualifications for equipment leasing are less stringent in comparison to financing; although, if it is essential for a business owner, continuous payments on the leased unit are definitely an option, albeit a lot costlier when all is said and done.

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