Equipment financing is a blessing to many businesses today. With the ability to quickly obtain funds to buy, lease, or repair equipment, you can quickly scale production and ensure your business continues to run smoothly without a hitch. But how exactly does equipment financing work?
Are you considering seeking out equipment finance from a lender? Here is all you need to know about how this finance system works and what you need to do to secure equipment finance.
Equipment Financing 101: What Is Equipment Financing
Equipment is an integral part of many businesses today. All companies, at some point in their operations, use equipment to facilitate the production of their goods or services and other business functions.
Equipment in a business is a tangible long-term asset that benefits the business in many ways over several years of use. They are considered tangible assets because they have a physical form and can be touched, felt, seen, and used.
From small equipment like furniture and stationery to larger ones like catering equipment and trucks for transportation, equipment facilitates the delivery of services and increases business operational efficiency. Without the necessary and important business equipment, a business’s production and operations will suffer, causing them to lose money and eventually be unable to continue business operations.
Essentially, the success of many businesses today depends on the presence of equipment in their operations. So, what happens when a company cannot afford to buy equipment or repair a faulty one?
Although many business owners set aside capital for purchasing new equipment when necessary, not every business has the cash flow or financial capacity to buy equipment when needed. As a business that relies heavily on equipment to function and make a profit, it can be discouraging when the very thing that guarantees the success of your business is out of your financial reach.
In cases like this, when businesses cannot purchase equipment out of their pocket, they have to look for alternatives to get the equipment they need to remain in business. One of the many alternatives that business owners often seek out is equipment financing.
Equipment financing is an excellent solution for businesses that need immediate financial solutions to purchase the equipment they cannot buy at the time. Getting the appropriate funding to purchase equipment is one of the most common reasons why businesses apply for loan programs, and equipment financing is a solution that is highly sought after.
But what exactly is equipment financing?
Equipment financing is a loan used to purchase or obtain business equipment. With equipment financing, applicants are provided with the funds to lease or buy essential equipment that they need to start, expand, or sustain their business.
Many businesses today depend on equipment to get the job done but lack the current financial capability to finance the purchase of this equipment. Equipment financing eliminates financial obstacles plaguing these businesses by offering immediate funds to help them get the equipment needed to scale their business.
What Industries Or Sectors Can Get Equipment Financing?
Knowing what equipment financing is one thing, and knowing if your business is eligible for it is another. This is especially important to understand because some business sectors are more capital-intensive than others and will require a more significant investment. For example, a restaurant might require large capital, but it cannot be compared to the finances needed to start or sustain a construction company.
Thankfully, equipment financing can be used in several business sectors or industries. Some of these include:
- Restaurant or food service
- Oil field
- Aircraft and crewless aerial vehicles like drones
- IT companies
Essentially, if you are a:
- Bar and pub business
- Cafe and bakery business
- Food service, delivery or restaurant business
- Events and marquee business
- Farming or agro-centric business
- Trucking, bus, car, or haulage business
- Software or other IT-based business
- Laundry and dry cleaning business
- Warehouse business
- Other companies that fall in the categories above
You may be eligible for equipment financing.
Types of Equipment Financing
As with other loan programs, different equipment financing categories are different ways of funding a business’s equipment. If you are considering applying for business equipment financing, you have two primary financing options.
1. Equipment Leasing
According to the Equipment Leasing Association of America, more than 80% of American companies choose to lease some or all of their equipment instead of purchasing it. The term ‘leasing’ is often used interchangeably with ‘borrow’. In a way, you can think of equipment leasing as borrowing equipment from a lender.
Equipment leasing is a sought-after type of equipment finance, especially by businesses that do not have the means of purchasing equipment out of their working capital. It is also primarily an option for companies that are not viable or cannot be approved for getting equipment funding from a lender.
Equipment leasing is a type of financing where businesses rent equipment instead of purchasing them. In this case, the business leases the equipment from a lender who purchased it and put it up for ‘rent’. Instead of outrightly purchasing expensive equipment- which might be impossible at the business’s current financial position- you can lease the equipment and spread leasing payment over the next few months, years, or the duration of the leasing period.
Equipment leasing is an excellent equipment financing option for many reasons. Other than the financial benefits of leasing equipment, businesses also get to enjoy this equipment without having to worry about equipment depreciation or obsolescence.
Buying equipment and paying upfront is costly but maintaining the equipment throughout its lifetime is equally expensive. This is especially true if you work with equipment with a short lifespan of a few years before it becomes obsolete and is considered inferior. When this happens, a newer equipment version will be produced, and you will begin to worry about purchasing this newer version.
When you lease the equipment, you don’t have to worry about constantly getting a better upgrade by purchasing newer versions of your company’s equipment. Leased equipment is easier to scale as you can easily update your equipment at the end of your leasing term.
Additionally, leasing involves lower monthly payments that are usually spread over a few months or years. Although leasing equipment comes with additional charges like interest and other financial agreements, it is a cheaper alternative to making up-front payments for equipment.
How To Lease An Equipment
Leasing equipment is easy as long as you work with a legal lender. When considering an equipment leasing option, it is essential to ask yourself crucial questions that will help you determine if equipment leasing is the best option for your business. Some of these questions include:
- What is your monthly budget?: you might not be able to afford a one-time payment for the equipment you need, but you should have a monthly budget that factors comfortably into your business expenses. You need to be sure that you can afford the monthly payment for the equipment without these payments adversely affecting other business expenses.
- What’s your planned usage duration?: unless you plan on leasing equipment forever- which is not cost-effective for any business- you need to plan how long you will be leasing equipment.
- Can the equipment be leased?: Not all equipment can be leased. This is why it is crucial to research equipment leasing options before approaching any lender.
- How quickly will the equipment become outdated?: if your line of business involves working with equipment that is often becoming obsolete too fast, you need to ask yourself if purchasing or leasing will be the better option
Next, you need to find an equipment dealer or lessor that offers leasing services for the equipment you need. You can choose to work with a leasing company, an independent lessor, or a lease broker, depending on your preference and budget.
Afterward, you apply for the lease. Equipment leasing is not a loan, but it requires background checks on your company for the lessor’s safety. You will be required to submit several documents before the application begins.
The application process takes between 24 and 48 hours before approval is given. Subsequently, it will be necessary to review the lease plan and structure. You will be required to sign documents and follow up with the first payment in most cases.
Lease terms resemble rental lease agreements, which may differ in many cases. The lease terms will spell out your responsibilities—all of which you must agree with before the equipment is released.
Although lease durations and terms vary, the rule of thumb is that leased equipment is returned to the dealer at the end of the contract. This is known as an operating lease, as the business can use the equipment for a specific period without claiming ownership.
2. Purchasing Equipment With Loan
Unlike leasing, equipment financing comes from a loan paid directly to the applicant. The loan proceeds are then used to purchase business equipment such as vehicles or printing machines.
Equipment financing is a type of loan that is split throughout installment payments. The amount to be repaid will include an interest percentage that varies with the loan amount, the lender’s terms, and the repayment period. This period can last anywhere from a few months to ten years or more.
As a form of security, the lender will request a lien for the equipment purchased using the loan. This will act as a form of collateral in case the business defaults on the payment terms and does not hold its end of the deal. In this case, the lender will gain full custody of all the equipment purchased.
Many lenders take it further by requesting liens on some business assets, taking these assets as collateral security. If the business fails to repay the loan, the lender will gain custody of these assets. However, if the business repays its loan without any problem, it gets custody of the equipment, and the liens are rendered dormant.
How Equipment Financing With Loan Works
If you plan to apply for equipment financing, you must note that not all lenders or equipment vendors are the same and operate on the same terms. This is why it is vital to tread all agreements before going forward with the application process.
As with any other loan type, equipment finance often has general qualifications and specific eligibility requirements. These requirements range from annual revenue information to a credit score limit and up-to-date business history. Knowing this information will help the lender decide if your equipment financing application will be approved or not.
In addition to personal and business financial statements, lenders will request a detailed business plan and proposal for the future growth of the business. This will give the lender insight into the company’s operations
Although terms vary- as we mentioned above- equipment financing money institutions rarely offer a 100% loan amount for the equipment purchase. Instead of providing the whole value, money lenders often offer 80% of the equipment’s value.
For example, if you applied for a $20,000 loan for equipment, the lender is more likely to offer $16,000 than it will be to offer the total. Added interest rates can range anywhere from 4% to 30%, depending on the lender.
Benefits of Equipment Financing
Getting the right equipment for your business can make the ultimate difference between growth and stagnation. Would you rather wait till you can afford that expensive state-of-the-art equipment at the detriment of your business or operations, or will you rather be able to afford it now and make the most out of your business?
Equipment finance offers an easy solution to afford big-ticket purchases without any delay. Some benefits of leveraging equipment financing include:
- Being able to stick to a regular business budget. Equipment finance is often repaid as a monthly lease payment. This figure can be factored into the business budget, ensuring that all expenses are minimal and allowing the company to prepare accurate budgets over the next few months or years.
- It allows a business to preserve a larger capital than it would have been if full payment for equipment was made upfront. With equipment financing, businesses can direct the cost of the equipment to other more important aspects of operations.
- Equipment financing offers more financial convenience and flexibility.
- Businesses will be able to purchase more essential equipment than they will without equipment financing.
- Some equipment finances offset tax-deductible payments for tax relief (similar to Section 179).
- Without worrying about obsolete equipment, businesses can focus on keeping up to date with the latest updates or technology.
Leverage The Power Of Equipment Financing With Coastal Kapital
Are you interested in applying for equipment finance?
Equipment finance is an excellent financial solution for when you lack the cash flow needed to replace or repair your small or heavy business equipment. However, to make the most of this financial solution, it is essential to work with expert lenders.
At Coastal Kapital, we offer a series of equipment financing options that are perfect for your business. From buyout lease options to fair market value leases (FMV lease), when you work with us, you can expect nothing but swift, cost-effective loans with low risks or hidden fees.
Let us get you started on getting the equipment you need for your business. Apply now by filling out the application form on our website.