Businesses who wish to keep cash flow flexible but need new equipment can use equipment financing. Equipment financing loans apply to virtually all industries and equipment types.
What is Equipment Financing?
Equipment financing is an asset-based credit that enables business owners to acquire or lease equipment without using up their operational capital. With equipment financing, equipment is used as collateral to secure funding. Rather than basing approval on a business owner’s credit score, lenders place a greater focus on the equipment’s worth.
Why Businesses Use Equipment Financing
Most companies, whether they are investing in machinery or a new technological system, must keep their cash flow flexible while improving their operations flow. Equipment financing is the perfect choice for accomplishing this goal, as it offers many advantages.
A loan secured against machinery or technology is referred to as an equipment loan. This sort of financing makes it possible for companies to get the equipment they need. Lenders will often offer a company funding that is secured by the equipment. The company will repay the money, with interest, in monthly payments.
Because equipment can be used as collateral, it will be repossessed if the company is unable to fulfill the requirements of the repayment agreement. When all of the money owed on the loan has been paid back, the business will officially own the machinery.
Leasing and sale-leaseback, two forms of equipment financing, can result in significant tax savings compared to the outright purchase of the asset. This is because leasing an item results in a monthly cost rather than an asset recorded on your balance sheet for that item.
Companies may also benefit from predictable payments and stretch out the expense of the equipment over a longer period of time with most types of equipment financing. That makes cash flow management a little less burdensome for businesses, which frees them up to concentrate on operations.
As a result, equipment financing is an excellent instrument for capitalizing on growth, as it provides a flexible method for increasing output using brand-new, cutting-edge technology, machinery, or equipment.
Types of Equipment Financing
There are two forms of equipment financing: Obtaining a loan or leasing. Both provide a variety of periods and degrees of commitment based on the equipment companies require.
Applying for a Loan
When firms use a loan to acquire equipment, the equipment functions as collateral for the loan. Therefore, the lender has a claim on the equipment and may seize it if the borrower defaults on loan payments.
A lender may be willing to lend up to the full value of the equipment if the loan is secured by considerable collateral. Nonetheless, a down payment of 20% of the equipment’s value is usually required.
Thus, consideration should be given to a company’s ability to repay the loan. If they are uncertain about their ability to make the payments, it may be preferable to lease the equipment.
The lengths of loans for company equipment range from a few months to ten years. The interest rates vary on the firm’s (or owner’s) credit rating, the length of time the business has been in operation, the loan’s term, and the equipment’s capacity to preserve its worth.
The business will possess a valuable item once the loan has been repaid, which is one of the primary advantages of equipment purchase over leasing. If the company needs to borrow money for other objectives, such as business expansion, it can utilize the previously acquired equipment as loan collateral to secure more favorable loan conditions on subsequent financing.
Leasing equipment might be advantageous for several reasons. First, it may be easier to obtain than a loan because the terms are less financially demanding. Accordingly, leasing is frequently a less expensive choice, particularly for short-term financing, because it typically does not demand a down payment and does not involve paying a significant amount of interest.
The type of equipment to be acquired is a further factor that may influence a company’s or owner’s decision to lease. Leasing is a far more advantageous choice for firms seeking to finance equipment that is quickly becoming obsolete and must be replenished. This allows them to lease newer, more advanced equipment over time. However, they should carefully analyze the lease agreement’s provisions, particularly if there is a financial penalty for early termination.
Some leases contain an option to purchase after the lease term. In this scenario, the most obvious decision for a business owner is whether they want to acquire the leased equipment after the lease’s conclusion. As such, the primary benefit of leasing is not having to worry about equipment obsolescence and depreciation.
Which industries are relevant?
There is always some asset that businesses would like to have in their operations, regardless of the industry – Equipment finance allows firms to acquire or lease the necessary equipment to function and expand. Again, everything from computer equipment to air conditioning can be funded. This way, a loan for equipment may assist firms in improving their cash flow and meeting their continuing costs.
Equipment Financing Options
Equipment leasing and equipment finance are the two forms of equipment financing.
Equipment financing grants firms complete ownership of the financed equipment. On top of the principal sum, they typically make a predetermined monthly interest payment. However, after the financing time expires, they own the equipment in its entirety.
With equipment leases, companies pay a monthly lease charge for a specific length of time when leasing equipment. After the lease, they normally have three options:
- Return the property
- Renewal of the lease
- Buy the equipment
Typically, to secure equipment finance, firms must satisfy the following criteria:
- Minimum of one year in business
- At least $50,000 in annual income
- A credit score of at least 650
Businesses with a credit score under 650 may still be eligible provided they can demonstrate solid cash flow and revenue over the previous three to six months.
In addition, one of the many advantages of equipment financing is that the equipment may be used as security, allowing firms to secure finance without putting their assets at risk.
The specific requirements vary based on the lender and the equipment type. Each lender decides the maximum loan amount based on the sort of equipment the firm is acquiring, its lifespan worth, and whether it is new or used.
In a nutshell, equipment financing allows companies to expand their operations without exhausting their available monetary resources. In addition, the standards for qualifying are not overly difficult to fulfill, given that the funding is accompanied by physical collateral.
The optimal equipment financing option relies on the type of equipment a business requires, the length of time it anticipates using it, and the frequency with which it wants to replace those assets. Hence, interested parties are invited to utilize a calculator for equipment loans to compare prices.
If you’re interested in equipment financing, then contact National Funding today to speak with one of our Funding Specialists.