Equipment Financing & Loan Rates

Having the right equipment is vital to all businesses. Whether it?s computers, manufacturing equipment, or tools you use, we all need to have suitable equipment to provide the best products or services for our customers. Struggling to get by with outmoded, obsolescent equipment simply won?t lead to long-term business success. Luckily, equipment finance is available to ensure you can get the equipment you need to best serve your customers. Best of all, because you are investing in a tangible asset, interest rates are often favorable, and qualification standards comparatively low to standard term loans.

What is equipment financing?

Equipment financing is a loan or lease agreement that allows your business to purchase the equipment it needs; the equipment you buy acts as collateral for the finance. This lowers the risk for the lender, making equipment financing more affordable than most. While traditional banks often offer the best rates and longest terms, they also have the strictest qualification demands. The application process is often drawn out and rigorous. Alternative lenders cannot match the interest rates and long terms of banks but can process applications quickly so that you can buy the equipment you need when you need it.

What is an equipment finance loan?

You will rarely be offered the full amount you require and will be expected to put up around 15% of the total yourself. The finance company will then give you the other 85% to purchase what you need. However, because the equipment purchased can be used to offset the debt should you default, interest rates are typically lower than they would be for other types of finance. Startups often find it difficult to secure finance, and equipment loans and leasing is one of the few avenues open to them.

How Equipment Financing Works

Equipment financing can broadly be divided into two types, equipment loans, and equipment leasing.

Equipment Loans

There are finance companies that offer equipment-specific loans. They give you a sum of money for the purchase of equipment that you pay back, plus interest, on a regular basis for the term of the loan. Generally, this term should reflect the time you will be using the equipment for.

Equipment Leasing

This type of loan is like leasing a car, and so can differ depending on the company you wish to lease the equipment from. You may be regarded as the owner of the purchased equipment, or ownership may reside with the finance company. Consulting your accountant is essential as there are serious tax implications that you need to understand. The main financial advantage of a lease rather than a loan is you don?t normally need to find that 15% down payment, which is often difficult for startups, for instance. Just like loans, leases spread the cost of the equipment purchased over time. With leasing, there is usually a residual amount to pay at the end, which may be a figure approaching the used value of the equipment or almost nothing, depending on the terms of the lease. Operating leases are usually for a short period and result in a large residual, but also offer you the option to return the equipment rather than buying it. On the other hand, capital leases are much closer to loans, the residual may be as low as $1, and you end up as the sole owner of the equipment.

Who needs equipment financing?

Most small businesses need external finance at some point. Equipment purchase can be a serious drain on your working capital but is often vital to a successful business plan. Being able to purchase the equipment your business needs while not crippling it financially is a huge advantage. The capital outlay needed to keep your equipment up to date and competitive can be beyond a business?s financial capabilities. Equipment financing allows you to compete and expand without seriously undermining your cash flow and operating expenses.

What are the reasons to finance equipment for your business?

There are several reasons why equipment financing may be a good fit for your business: 1. Technology changes very quickly, and falling behind usually results in loss of business and reduced revenue. Equipment finance can allow you to keep your business at the cutting edge of your sector while ensuring that your products and services are the best possible. 2. You don?t have to put up your own collateral. This means that your home and property are safe should your business stumble and be unable to repay the loan. Knowing you will not lose your house, car, or other property reduces your anxiety and worry. 3. The qualification process is straightforward because the lender?s risks are lower than most other loans. 4. If you go for the leasing option, you can simply return the equipment at the end of the agreement, which means you are not saddled with obsolete and worn equipment. This is particularly helpful with computers and other high-tech items.

What is an equipment finance agreement?

For an equipment finance loan, the agreement would involve the lender offering you the sum of money you need to purchase the equipment you need. They will give this to you as a lump sum, and the agreement will state the term of the loan and the interest chargeable. You then make regular repayments, usually monthly, for the term of the loan, by which time you will have paid back the whole loan, including the interest. At that point, the equipment will be yours to do with as you like. On the other hand, an equipment lease is usually more complicated and much more variable from lender to lender. A leasing agreement often allows you to simply return the equipment at the end of the agreed period. This can be a smart move as much equipment becomes quickly out of date and unreliable. Being able to negotiate a new leasing agreement and buying all new equipment for your business allows you to always be at the top of your game. Some leasing agreements give you the option of purchasing the equipment at the end of the lease at the current market value. Most often, leasing is the more expensive option but can be the best if you are only planning to use it for a maximum of 36 months. It probably makes more sense to buy if the equipment?s working life is longer.