Equipment Financing An Overview of Equipment Financing
Author: Grant Olsen
Date posted: 12.29.20

This can be a very affordable option for financing equipment and can be structured as either a loan or lease. Repayment terms range from 2 -7 years, with amounts up to $1 million. Similar to traditional automobile financing; at the end of a loan, you own the equipment outright and at the end of a lease, the equipment normally must be returned.

Equipment Financing For Small Business

As a small business owner, you are well aware that it’s important to manage your cash flow. Having funds available to pay bills and knowing when your next deposit is arriving both help to ensure the ongoing survival of your operation.

 

Whether your business is just starting out or is looking to expand, you may find that your business needs some expensive equipment to take the business to the next level. Even if your company has the cash available to make a large purchase, it may make more sense to explore financing options prior to making the purchase so you don’t deplete your cash reserve. In today’s low-interest-rate environment, you’ll find that financing is more affordable than ever.

 

 

When Should You Finance Your Purchase?

There are several situations where it makes sense to finance a large purchase instead of using cash.

 

  • You may need additional equipment in the future. It’s easier to qualify for financing when you can show that your business has assets, including cash ,which will help you meet your obligation.
  • You want to build your business credit history. Businesses can develop credit scores just like individuals can and having a solid payment history can help you improve your business’ score. Although, if you are unsure that you will be able to meet the monthly loan or lease payments, you should keep in mind that a poor payment history will hurt your business’ credit score.
  • Your business may have unpredictable cash flow and seasonality in its sales which makes it wise to maintain large cash reserves to weather periods of lower revenue.
  • You don’t have the funds available to cover the entire purchase in which case financing is your only choice to obtain the equipment you need.

 

Once you’ve decided to finance your purchase, you’ll need to evaluate which type of commercial financing is right for you.

 

How To Determine the Right Type of Loan for Your Business

When it comes to securing loans for equipment financing, you have several options available. Which option is appropriate will depend on your credit, the business’ cash flow, and your goals in securing financing.

 

There are several factors that will determine which type of loan is available to you and your business including the length of time you have been in business, your monthly revenue, your credit score, and the purchase price of the equipment. Additionally, prior to making any purchase, you need to evaluate your ability to pay back the loan and your comfort level with debt.

 

Equipment Loan

Commercial equipment loans are obtained directly from banks or other financial institutions. In this case, each institution can set its own standards for loan qualifications. Lenders will still require significant documentation about business operations, tax returns, and intended use of funds. These loans are available to businesses with a minimum of $10,000 of monthly revenue and business owners with credit scores of 600 or higher.

 

Equipment loans can be obtained for loans of up to $5 million dollars. The loan terms are usually 2-5 years depending on the size and purpose of the loan. Shorter repayment periods will have lower interest rates. One of the main benefits of an equipment loan is that it can be funded within 2-5 business days. So once you’ve decided to make an equipment purchase, you can have the funds available to make the purchase within a week. The loans are secured using the equipment as collateral. In the event that you can no longer make the payments, the equipment may be repossessed.

 

 

Equipment Lease

Equipment leases are similar to loans. The key difference between the two types of financing is the ownership of the equipment. With an equipment loan, at the end of the loan term, you own the equipment. For an equipment lease, at the end of the lease term, you have the option of purchasing the equipment at the fair market value of the equipment. The fair market value at the end of the lease is determined by the useful life of the equipment, how much the equipment has worn down over the time you’ve possessed it, and whether newer models are available at the end of the lease term.

 

Equipment leases are available for equipment of up to $5 million. Because you do not own the equipment, in the event that you can no longer make the payments, the equipment can be repossessed by the owner which is the financing company. Lease payments are generally lower than loan payments because the financing company retains the right to the equipment at the end of the financing term.

How to Choose Between an Equipment Loan or Lease

Though commercial equipment loans and leases share a lot of similar features and terms, it is important to understand the differences when choosing between the two options.

 

Leases are especially beneficial if the equipment you are purchasing needs to be replaced every few years. Once your lease ends you are able to turn in the equipment and obtain new models of the equipment you need.

 

If the equipment you are purchasing lasts for decades and can be maintained with low maintenance costs even after it is paid off, you may find that an equipment loan will make the most financial sense for your company.

 

After looking at the options you qualify for, the useful life of the equipment, and your business goals, you should have a good idea of the best financing option for your company.

About The Author | Grant Olsen

Grant is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant has a B.A. in English from Brigham Young University.

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