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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