What You Need to Know About Equipment Financing
Equipment financing refers to an arrangement where your lender finances you to acquire assets for your business needs.
Through this approach, you can purchase assets, such as a computer, printer, furniture, and many more.
Oftentimes, purchasing business assets can be challenging if you don’t have adequate cash.
Also, buying equipment through cash can deplete your limited funds and paralyze your business activities. But to overcome this challenge, equipment financing is the better option.
It is vital to note that equipment financing is less risky, and lower costs characterize it. Therefore, this option is an ideal method of acquiring concrete equipment for your enterprise.
How Does Equipment Financing Work?
If your business requires a piece of equipment to enhance its operations, getting asset finance is the way to go when you don’t have sufficient funds.
The amounts of money you can borrow depend on the value of the equipment and whether the asset is new or used.
Note that the equipment you purchase serves as collateral in guaranteeing your credit facility.
It is crucial to note that the price of the asset determines the loan amount and the terms of repayment.
With equipment financing, there is no need to put up any extra collateral because a business asset is a secured loan.
Therefore, this feature of asset financing makes it more comfortable for entrepreneurs to qualify for this type of loan.
Under equipment financing, you are supposed to make periodic payments of principal and interest till the end of the loan tenure.
Since the equipment you buy acts as collateral, the lender may put a lien on it until you clear the loan.
Upon successful completion of credit repayment, the machine becomes your asset.
Equipment financing requires that you pay fixed interest rates between 8-30% until your credit is cleared.
Note that if you fail to repay your loan as scheduled, the lender has a right to repossess and dispose of your asset to offset the outstanding loan balance.
Equipment Financing Rates and Terms
Equipment financing rates vary from one lender to another and depend on the borrower’s qualifications and prevailing market conditions.
It is vital to note that most lenders finance between 80-100% of the value of the asset. With equipment financing, the repayment period is up to 10 years or more.
Moreover, the approval time for this loan is less than two business days, and for you to qualify for it, you must have an excellent credit score and a sound business history.
Qualifications for Financing Equipment
For you to qualify for financing equipment, you must meet the requirements, as explained below.
A credit score is an essential benchmark that lenders use to gauge your creditworthiness.
A higher score means that your loan is likely to be approved. If you want to know your credit score, you can use the free online tools.
The majority of lenders consider a credit score of at least 600 before approving any facility.
A business plan is a document that describes and gives a detailed proposal for your business’ future growth.
The primary goal of a business plan is to provide lenders with an overview of your business to convince them to make a favorable decision regarding your loan approval.
When preparing a business plan, it is vital to note the number of years your business has been in operation and the annual revenue.
A balance sheet is a statement that shows the financial position of your business at a particular time.
The essence of the balance sheet is to help lenders evaluate the financial strength of your business before approving the facility.
If you are a small business owner who doesn’t have a balance sheet, you can prepare personal financial statements.
A cash flow statement is a document that shows the state of your business’ liquidity. The term liquidity refers to the ability of your business to finance its operation without difficulties.
Lenders usually use the cash flow statement to identify the sources of your revenues and your business expenditures.
An equipment quote is a document showing the features of the asset you are buying and the price.
Lenders use this statement to determine the amount of loan to advance you.
Business Tax Returns
The filing of tax returns is a vital aspect that lenders consider before approving equipment finance loans.
Where to Get Equipment Financing
Getting equipment financing is not a challenging task provided that you meet the lender’s requirements.
There are several options you can use to get this facility, as highlighted below.
Traditional lenders include commercial banks, credit unions, and microfinance institutions.
Although these lenders have strict conditions, their terms are better and convenient for you.
It is crucial to note that banks prefer lending to businesses that are well established with stable cash flows and financial statements.
The majority of online lenders don’t impose strict conditions in advancing their credit facilities. However, their rates and terms are less favorable.
It is essential to note that online lenders are suitable for startups or small business people who are unable to meet the requirements of traditional lenders.
A captive lessor is a leasing agency established by producers to offer finance for their products.
Therefore, if you are buying a business asset, a captive lessor can finance the equipment you are purchasing.
How to Apply for Equipment Financing
Applying for equipment financing is a straightforward process, and the ease of application is based on the lender you are working with.
If you want to convince lenders to approve your facility, you must provide them with your credit score and the documents showing your financial ability to repay the loan.
Moreover, an equipment quote is a requirement in the application process. The quote helps lenders to get the details of the asset you intend to buy.
Therefore, to apply for this loan, you need to fill in the loan application form with your personal and business details.
Next, attach the required documents, such as bank statements, equipment quotes, credit score, business tax returns, and driving license. Finally, submit your application and wait for the approval verdict from your lender.
Differences Between Equipment Financing & Equipment Leasing
There are two options that you can use to buy equipment – equipment financing and leasing.
As an entrepreneur, it is crucial to know the difference between the two arrangements, as highlighted below.
With equipment financing, you are given a loan to purchase equipment. The asset you buy acts as collateral, meaning that if you fail to repay the credit, it will be repossessed to clear the loan.
Equipment loans are suitable for borrowers who want to acquire expensive assets, but they are unable to make the purchase through cash.
It is vital to note that with equipment financing, most lenders are willing to advance you between 80-90% of the value of the asset.
The disadvantage with this method is that at the end of the loan tenure, this approach will be more expensive than buying an asset through cash.
With equipment financing, the cost of borrowing is based on the loan amount, interest rate, and repayment period.
Therefore, before you apply for an equipment loan, it is advisable to calculate the cost to make informed decisions.
Leasing is an appropriate method of acquiring equipment in case you are unable to make a 20% contribution as required when purchasing an asset through asset financing.
With leasing, you don’t borrow money to buy the equipment, but you only pay some charges to acquire it.
It is critical to note that with this arrangement, the leasing company owns the equipment as you use it.
You can lease equipment based on your company’s business needs. For example, some firms enter into a lease agreement to replace their assets with the latest ones.
Note that leases are a bit more expensive because they carry a more significant interest rate than loans.
It is essential to note that there are two types of leases – capital and operating. A capital lease is ideal in financing an asset for your long term use.
However, an operating contract is appropriate for the stuff that you would return to the lessor after the repayment period.
Factors to Consider in Determining whether to Lease or to Take Equipment Finance
Before you decide whether to lease or buy equipment via a loan, it is vital to consider the following factors.
The majority of lenders giving equipment finance loans require that you make a down payment of 20% before your loan is approved.
In case you are unable to meet this requirement, then you should lease the equipment.
It is vital to note that smaller monthly repayments characterize a lease.
Therefore, if the performance of your business is not right, you should opt for the rent. However, if you intend to purchase the asset in the end, then a loan is ideal for you.
The Period You Need The Equipment
If you need an asset for at least three years, buying it through loan or cash are the better options. Purchasing equipment via a loan is less expensive than hiring it through a lease.
The Equipment’s life
In case you want to use an asset that is likely to wear out fast, leasing is the better option.
Therefore, before you enter into a lease agreement, ensure that the asset you are leasing doesn’t become redundant before the end of the lease term.
Reasons Why You Need Equipment Financing
As an entrepreneur, you may require equipment financing because of the following reasons.
Some business assets are expensive; thus, it may be challenging to buy them beforehand.
Therefore, equipment financing is an ideal solution under such circumstances.
Need for frequent replacement
Some assets need to be replaced frequently because of their short lifespan.
Also, sometimes, you may need to purchase a machine with the latest technology to suit your business needs. Under such scenarios, you may need equipment financing to achieve your financial requirements.
To save cash
Buying your asset through equipment financing can allow you to divert your limited money to other business operations, such as expansion, bills payment, and marketing.
To boost your business performance
With equipment financing, you don’t have to pay a lump sum to get the asset, but small monthly payments while your equipment generates income.
Hedging against inflation
By signing a loan agreement, it means that even if an increase in price occurs in the future, your loan term will not be altered.
It establishes long term financial credit
With equipment financing, your company can get a loan to buy a business asset. Financing equipment is crucial since it enhances your long term business credit.
Therefore, this implies that you will have a high credit score to borrow money in the future.
Buying an asset using cash can affect your monthly or annual budget. However, getting asset finance and paying it via monthly installments is more comfortable and manageable.
Therefore, equipment financing will give you a chance to direct your funds to other business operations, such as paying bills and investment.
Conclusion on Equipment Financing
Equipment financing is an arrangement whereby you buy a business asset through credit. The loan amount you acquire depends on the value and nature of the equipment.
For you to qualify for equipment financing, you must meet the lender’s requirements, such as having the right credit score.
Also, you must provide the lender with documents, e.g., the balance sheet, business plan, equipment quote, and business and personal tax returns.
You can get equipment financing from either traditional or online lenders.
Although the conventional lenders (banks and credit unions) have favorable terms, their conditions are strict. With online lenders, their requirements are not stringent, and, therefore, small business people and startups can qualify for their loans.