Equipment Financing: What Is It and How Does It Work?
A company loan for purchasing new or old equipment, such as automobiles, machinery, or technology, is known as equipment financing. Equipment loans can cover up to 100% of the cost of the equipment you’re looking to buy. These loans are repaid with interest over time.
Business equipment financing is asset-based finance, implying that the equipment secures the loan. As a result, equipment finance is frequently easier to obtain than other small business loans. Equipment loans can be a terrific choice for startups or enterprises with average or poor credit scores.
Example of Equipment Financing
Let’s proceed through an example now that we have a fundamental understanding of how equipment financing works at Bridge Payday’.
Assume you need to buy a commercial oven for your restaurant, which costs $10,000. You locate a lender ready to provide you with an equipment loan for the entire cost of the equipment ($10,000). The lender will charge a 12-percent interest rate with monthly repayments over three years.
With this arrangement, you’ll repay the capital you borrowed over the three-year term with $332.14 monthly installments (assuming there are no other loan fees). Overall, you’ll pay $11,957.15 for a $10,000 piece of equipment, with an actual cost of $1,957.15 for your equipment loan.
Although this may appear to be a considerable sum based on the equipment’s value, the benefit of business equipment financing (as with other debt financings) is that you can spread the payment over three years and avoid saving $10,000 to buy the oven you need right now.
However, before consenting to an equipment (or any other sort) loan, it’s critical to grasp the exact cost of your finance.
How Does Equipment Financing It Work?
A business term loan is similar to equipment finance. You get money to buy new or old company equipment and make regular payments. You can typically borrow up to 100% of the equipment’s value, though this depends on the type of equipment, its condition, the lender, and your qualifications.
Business equipment financing is an asset-based loan, which means that the equipment is used to back or secure the loan. In most cases, this means you won’t have to put up any additional collateral and you won’t have to sign a personal guarantee.
However, you may be required to put down a 10% to 25% down payment on the financing equipment. The higher your down payment, the cheaper your interest rate will most likely be.
Equipment financing rates range from 4% to 40%, depending on the lender, your company’s qualifications, and the equipment you’re buying.
Equipment financing repayment lengths are typically five to six years, while specific lenders may provide lengthier terms of up to ten years. Furthermore, some lenders may base your repayment terms on the expected life of the equipment so that if you default on the loan and have to seize and liquidate the equipment, they can still recover their losses.
Equipment Leasing vs. Equipment Financing
Equipment leasing may be available through lenders, although there are some subtle distinctions between equipment finance and leasing.
- Similar to leasing a car, you choose to purchase the equipment after the term or enter into a new lease for the equipment you require.
- When you repay an equipment loan, you own the equipment after the term.
In the long term, equipment leasing is generally more expensive than equipment financing.
Learn more about the differences between equipment leasing and financing in our equipment leasing vs. financing guide.
The Benefits and Drawbacks of Equipment Financing
If you need to purchase equipment for your business, equipment financing can frequently provide you with favorable rates and terms. However, there are certain advantages and disadvantages to equipment financing.
- Business equipment financing is accessible from banks and alternative lenders, with minimal paperwork and a quick application process. Alternative lenders have more streamlined and speedier processes. Because lenders aren’t as concerned with your company’s qualifications, there are frequently fewer documentation requirements than other financing types.
- It’s a lot easier to qualify. Startups and organizations with weak credit might benefit greatly from equipment loans. Because the equipment secures the loan, lenders are generally ready to work with less qualified businesses. Furthermore, most equipment lenders publish your payment history to credit bureaus, which means that making on-time payments will enhance your credit score and make it easier for you to qualify for future loans.
- The loan’s collateral is equipment. Instead of putting up real estate or other business assets as security, your loan is secured by the equipment itself. You may also be able to work with your lender to avoid having to provide a personal guarantee on the loan.
- Reasonable Interest rates. The rates on equipment financing typically range from 4% to 40%. Interest rates vary, but they are normally reasonable. The bottom end of the range has similar rates to bank or SBA loans. Taking the Section 179 business tax deduction could help you save money.
- You can fund equipment purchases quickly. Some business loans, such as bank and SBA loans, can take weeks or months to fund, while equipment loans are usually much quicker. You can typically obtain equipment finance in a matter of days if you have all of the relevant information about the equipment.
- Only applies to companies that need to buy equipment. Equipment loans are designed to meet specific requirements. As a result, if you require money for a different business objective, you’ll have to look into alternative options.
- A deposit may be required. You may be required to pay down 10% to 25% of the equipment’s value in some situations. If you don’t have enough money for a down payment, getting equipment financing may be more challenging. Furthermore, if you can only afford to put down the bare minimum, your interest rate may be higher.
- By the time the loan is entirely returned, the equipment may be obsolete. This is one of the reasons why some business owners prefer to lease rather than finance their equipment. Furthermore, you do not own the equipment until the loan is paid off.