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Equipment Financing in 2020: Everything you need to know

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Sometimes, the only thing standing between your company and the next level of success is a crucial piece of equipment. You can’t scale without the right equipment, but you don’t have the capital on hand to purchase it. 

Equipment financing or leasing to the rescue. 

Coastal Kapital has the experience and know-how to connect you with manageable small business loans or friendly equipment financing terms. 

What Is Equipment Financing?

As you plan for growth, equipment financing or leasing can play an important role. Rather than draining your savings, you can take on payments that fit into your monthly budget.  Failsafe

Any business that relies on costly equipment can benefit from equipment financing. Common industries that need equipment financing or leasing include:

  • Construction (commercial and residential construction, consulting, cleanup)
  • Excavation (backhoe loaders, Bobcats, heavy machinery)
  • Utility Companies (environmental cleanup & vacuum trucks) 
  • Short Haul Trucking (goods hauling, truck rentals, truck repair)
  • Health and beauty (hair salons, spas, specialty HBA product production)

A typical equipment financing arrangement is straightforward. You select the equipment, apply for financing, and then make payments until you pay off the loan. When you’ve made your last payment, you own the equipment free and clear. 

There are several options to consider. Your lender can find a solution that benefits you and protects them from a loss:

  • The equipment itself can serve as collateral. If you default, the lender assumes ownership. 
  • Through a personal guarantee, which is lean on your personal assets.
  • With a blanket lien on your business assets, including the equipment. 

It’s essential to understand what you agree to when you sign on the dotted line. A lender that is not upfront with you about terms, risks, and obligations should raise red flags. Coastal Kapital makes it a point to educate borrowers to make the best choices for their business. 

Equipment Financing vs. Equipment Leasing

Like personal autos, when it comes to equipment for your business, you can take out a loan to buy the equipment or lease it for a set amount of time. 

Leasing

When you lease equipment, you’re essentially borrowing it from the equipment owner for a while. Depending on the lease, when you make the last payment, you can review new terms, choose new equipment to lease, or purchase the equipment. 

There are several reasons why a business might choose to lease instead of buy. Much of the time, you won’t need to come up with a downpayment or put up collateral. You will not be required to agree to a lien or personal guarantee, either. Leases are not as risky in this sense. 

It may be easier to qualify for a lease. If your business or personal credit is less than perfect, a lease can be an ideal solution. You get to use the equipment that can help launch your business to success right away, even if you aren’t able to secure a loan. If you’re in a better financial position at the end of the lease, you may be able to buy the equipment outright. 

It’s important to consider the overall cost differences between products like construction equipment financing and construction equipment leasing. Leasing equipment over a long period means you’re not obligated to purchase the equipment. 

However, it may be more expensive to rent long term than it would have been to make the purchase. For many businesses, the tradeoff is worthwhile. Coastal Kapital can help you determine whether leasing or financing is right for you. 

Equipment Financing Options

Small business owners can take on small business loans and use the cash infusion to purchase what they need. They can also finance equipment directly. Your lender will consider several factors when helping you decide which type of financing you should use:

  • Your business credit score
  • Your personal credit score
  • Years of experience
  • Business revenues
  • The amount of capital you need
  • Your preferred repayment terms

Each lender offers a variety of equipment finance products. Typical arrangements include equipment loans, term loans, small business administration loans, small business lines of credit, and business credit cards. 

Equipment Loans

When someone refers to equipment financing, they are usually talking about an equipment loan. As mentioned above, equipment financing often requires a downpayment, and you’ll need to put up collateral for the loan. The collateral can be limited to the equipment itself, but sometimes, the lender will require a business to agree to a personal or business lien on other assets. 

Repayment periods range from a few years to more than ten years. Like other loans, you’ll pay interest based on factors like your credit scores, the current financial climate, how much you borrow, and the length of the loan. 

Term Loans for Equipment Financing

Term loans are similar to typical equipment loans but offer favorable terms similar to a mortgage or car loan. If you have excellent credit and a proven business track record, you may qualify for desirable terms like low-interest rates, smaller origination fees, and so on. 

When it comes to financing large sums of money, a better interest rate can represent thousands of dollars in savings.

Small Business Administration (SBA) and Other Government-Backed Loans

While the funding process is often slower when working with government agencies, SBA loans and products like CDC/504 loans offer several attractive benefits:

  • Generous loan limits
  • Longer repayment period
  • Looser qualifications in terms of credit score and assets
  • Interest rates linked to the US Treasury, which are often lower than other loan rates

You’ll usually need to agree to put up the equipment as collateral and sign a personal guarantee. 

Small Business Lines of Credit for Equipment Financing

A business line of credit works much like a home equity line of credit or a credit card. The bank makes a specific amount of money available to you that you can draw on as often as needed. 

Typically, You must repay a business line of credit within a few months, though you can sometimes extend repayment over a few years. Interest rates are often quite a bit higher on a business line of credit than other financing options. 

In general, a business line of credit is best used in the short term to cover a cash flow issue. You can use it however you’d like, but you may find that another product will give you better overall terms for equipment financing. 

Business Credit Cards for Equipment Financing

You may find that a business credit card offers the least favorable terms of all the available options. Interest rates can be sky-high. 

However, if you don’t need to finance a large amount of money, a business credit card can offer unique benefits like rewards and cash back. You could apply these earnings to other expenses you incur as a business. Using a business credit card can make a lot of sense if you can pay off the card relatively quickly. 

Make the Right Equipment Financing Choice with Coastal Kapital

When you partner with Coastal Kapital for your equipment financing or leasing needs, you’ll be working with a team that keeps your goals in mind. We know not every equipment financing option is the right fit for every business. We’ll work to find the best solution for your specific needs. 

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