Equipment. No matter which industry you’re in and no matter what your business does, you’re going to need it. It may be desk phones, printers, chairs or computers. Maybe it’s heavier equipment, vehicles and specialized tools. In any case, these pieces of equipment are the things that make it possible for your business to function.
These things cost money and if you need a lot of equipment, you may be facing some big expenses. Making big expenditures on equipment can cost your business lots of working capital. Fortunately, there’s equipment financing. 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 qualifying for them is not overly difficult.
Pros and Cons of Equipment Financing
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 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 comes with collateral as an intrinsic stipulation, 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 an older 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. Many business owners who could pay for their equipment up front 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 expected useful life of the equipment.
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.
Second, 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.
Types of Equipment Financing
Various types of loans can be used to cover new equipment purchases, including invoice financing, microloans, and merchant cash advances. Although they’re more difficult to qualify for, SBA loans are another good way to finance equipment purchases. CDC/504 loans can be used to purchase more expensive equipment and be used to finance larger investments.
The Difference Between Equipment Financing and Equipment Leasing
Although the terms “equipment financing” and “equipment leasing” are sometimes used interchangeably, they are not the same things. Equipment financing allows you to own the equipment at the end of the term; however, with equipment leasing, you make monthly payments for the ability to use the equipment for a limited amount of time. This set amount of time makes leasing a more cost-effective option for equipment that you only need to borrow temporarily. Equipment financing is better suited for things that your business needs for an ongoing and extensive amount of time.
Here’s a basic rundown of the three major types of equipment leasing:
- Fair Market Value (FMV) Lease: With this lease, you make regular payments to borrow the equipment for a set term. When the term is up, you have the option of returning the equipment or purchasing it at its fair market value. These loans tend to have the lowest monthly payments but have more difficult qualification standards.
- $1 Buyout Lease: Similar to an FMV, you make regular payments to borrow the equipment for a set term. This lease behaves very similarly to a loan. At the end of the term, you have the option of purchasing the equipment for $1. Yep, just $1.
- 10% Option Lease: This lease is the same concept as a $1 lease, but when the term ends, you have the option of purchasing the equipment for 10% of its FMV. These usually include lower monthly payments than the above mentioned $1 buyout lease.
Applying for Equipment Financing
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
What method of equipment financing should I use?
Leasing is usually ideal for equipment that regularly needs consistent updating. A loan is best for equipment that will maintain its efficacy over a long period without the need to be upgraded.
Also, if you’re unable to pay out of pocket to finance this equipment, invoice factoring and lines of credit are sufficient alternatives.
The Bottom Line
Equipment financing is a great way to get that item your business has needed for some time. Its terms are ideal, and you can avoid big upfront expenses while still reaping the benefits of the equipment. Loans and leases are both good options but provide different benefits over different time frames. Whichever way you choose to finance your equipment, remember to compare which options are the most financially realistic and are most appropriate for your business’s equipment needs.
Crestmont Capital provides a variety of equipment financing agreements which suit many business equipment needs. Click here to learn more about our flexible options.