About Equipment Financing
“Equipment financing” refers to loans or leases used to buy equipment for business use. Companies seek out equipment financing when they need to make a new equipment purchase, but are not in a position to cover the full expense or don’t want to deplete their cash reserves.
Both new and established businesses going through growth and expansion phases can benefit from equipment financing. Equipment financing enables a company to buy new equipment and put it to work without having to come out of pocket for the full cost up front.
Equipment financing can be used for essentially any type of equipment that will be used in the normal course of conducting business. This includes titled equipment and vehicles and can be used to purchase equipment from vendors or through a private party. Companies can finance equipment purchases of all shapes and sizes, from just a few thousand dollars for a small item to many millions for things like vehicle fleets and even planes.
Equipment Loan vs. Equipment Lease
Loan and lease are sometimes used interchangeably, but there are some key differences worth exploring before deciding which is best for your business.
Equipment Loans are marketed under several names, Equipment Finance Agreement (EFA), Capital Lease, Finance Lease, and $1 Buyout Lease, but are all essentially the same loan structure. After the last payment is made, the equipment is yours. Equipment Loans are best suited for equipment with a long life span that will continue to be useful to your business after the loan term is over.
Equipment Leases are structured similar to auto leases, after the last payment is made you can either purchase the equipment for fair market value (FMV) or return it to the lender. Equipment leases can have lower monthly payments than loans, but end the term with a larger balloon payment – a great option for a company who sees increased cash flow on the horizon.
Before deciding which option is best for your business, we suggest a conversation with your CPA to discuss which structure may offer the best tax incentive for your company.
Benefits of Equipment Financing
Accessibility – Options are available for new businesses and challenging credit situations.
Term – Equipment financing can be termed out typically from 36-72 months. Longer terms equal lower monthly payments.
Interest Rate – Equipment financing loans are a lower risk to lenders since the collateral is the financed equipment. The lower risk translates to lower interest rates than unsecured loan options.
Drawbacks of Equipment Financing
Upfront Cost – Equipment financing may require a due at signing payment ranging from 1-2 payments to a 20% down payment.
Limited Use – Equipment financing can only be used to buy the specific equipment. Unlike unsecured loans funds cannot be applied to operating expenses.
The exact loan requirements will vary depending on industry, loan amount, and time in business.
Ownership – All owners with 10% or greater ownership will typically be required to be a personal guarantor
Bureau Scores – Personal Credit of at least 600 for the most qualified guarantor
Major Derogatories – Bureau reports stating open tax lien and judgements, unpaid collection accounts, and charge-offs/repossession may limit the applicant’s financing options.