What Is Equipment Financing and How Does It Work? Pt 1

If you are the owner of a small business, you would know just how significant it is to be able to economically and quickly acquire, upgrade or even replace the equipment needed to perform operations. Making an outright purchase can put considerable strain on the cash flow into your business.

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.