How Does Equipment Financing Work?

Equipment is essential no matter which industry you’re in. No matter what your business does, whether it’s an auto shop or an advertising agency, you’re going to need it. Maybe a cafe needs a new espresso machine or an insurance company’s regional office needs new computers. In any case, these things allow your business to do what it does best, but sometimes they need to be upgraded.

That being said, equipment can be expensive. Making big expenditures on equipment can cost your business lots of working capital and many times, you might not be able to pay for the equipment upfront. That’s where equipment financing comes in to the picture. These types of loans are a way for your business to get the equipment it needs while avoiding large upfront expenses. They’re not only some of the most common loans, but they’re also not difficult to attain.

What is Equipment Financing?

As we briefly covered before, equipment financing (or an equipment loan) is a helpful tool when you need a piece of equipment, but you don’t have sufficient capital on hand. It allows businesses to acquire pieces of equipment that they need to operate. We’ll get in to exactly how it works a little later in the article.

What constitutes as ‘equipment’ in equipment financing?

Equipment financing is often used for office supplies. Business owners use it for expenses on computers, desks, phones, and much more. It can also be used for less concrete things like software.

Equipment loans can also be used for heavier equipment like vehicles. Vehicles are a surprisingly common type of equipment that business owners acquire via equipment loans.

How Does Equipment Financing Work?

Now that we’ve covered what equipment financing is and some of the things that qualify as equipment financing, let’s cover how it works.

Most business loans require a borrower to have an asset of value to be used as collateral to secure the loan. With equipment loans, the equipment itself is used as collateral, so in most cases, the borrower is not required to provide anything else. Small businesses may find this especially advantageous, as they might not be able to own the types of assets lenders typically look for to be used as collateral for loans.

Since equipment financing already comes with collateral, lenders can be more flexible about approving applicants. Your business’s credit score is a lesser factor; therefore, lenders are virtually just as likely to approve a younger company as they would be to approve one with more experience. Also, applying for equipment financing features less paperwork than applying for a regular business loan, so the application and approval processes are usually quick.

Equipment financing typically covers a significant percentage of the total price of the equipment. This coverage allows business owners to get the equipment they need without having to face a huge up-front expense. That being said, it is ideal that the business owner makes as big of a down payment as the business will realistically allow because this indicates to the lender that the business and its owner are trustworthy and on relatively stable financial ground.

Many business owners who could pay for their equipment upfront still choose to use equipment financing since it allows them to use that money to improve their business in other ways. Also, a positive byproduct of equipment financing is that it is good for your business credit.

Terms for equipment financing are often rather flexible when compared to those of a regular business loan. Equipment financing terms can last anywhere from a few months to over a decade, depending on the durability and relevance of the equipment. As we mentioned earlier, it’s tough to narrow the average interest rate down to a single figure, because of the specific factors which are considered on a case-by-case basis.

There are a few limitations on equipment financing. It can only be used to purchase equipment. It can not be used for other things like property refinancing or working capital. Also, there will be a UCC filing against the business, which is a claim stating that the lenders own part of your equipment until the loan is paid in full.

Generally, equipment loans are more obtainable for businesses than standard business loans, but lenders will still want to see that your business is capable of turning a profit and that your new equipment will augment your progress down the road. When you apply, lenders will likely ask for:

• A copy of some form of government-issued identification, like your driver’s license
• Your business license or certification
• An invoice or purchase order of the equipment

Similarly to applying for a regular loan, it’s always better to be prepared with plenty of documents and information, as opposed to not enough.

Then, you can apply. (We at Crestmont Capital offer a quick and simple application process.) If a lender approves your application, they’ll spot you nearly or all of the cash you need to buy your business equipment.

After you receive your financing, you repay that loan amount with interest over a previously stipulated period of time. The length of the equipment’s value will partly dictate the term length of the loan. Once the loan is paid off in full, you own it and it’s yours to keep. It’s worth noting that if the equipment becomes outdated or is no longer needed while you’re still within your loan term, you’re stuck with that equipment until the end of your term. If you think this might be the case, equipment leasing might be better suited for your business’s needs.

The Bottom Line

Sometimes, your business might not have the capital on hand to cover expenses for new, necessary equipment. Fortunately, equipment financing is a convenient and effective solution to your business’s equipment needs. Its terms are ideal, and you can avoid big upfront expenses while still reaping the benefits of the equipment. Depending on your time frame, a lease might be better than a loan. So, you should evaluate your needs and chat with a financial advisor or business lender.

Crestmont Capital provides a variety of equipment financing agreements which suit many business equipment needs. Click here to learn more about our flexible options. You can also contact us if you’re interested or have any questions!