How Equipment Financing Stands Out From Standard Loans
If you’re a small-business owner, you’ll understand the importance of the equipment that is utilized daily by your business. Whether it be computers and desks for an office or necessary tools for a restaurant’s kitchen, your company needs these items to function - and ultimately to create a profit. Purchasing equipment, however, can have a significant financial impact, and may be impossible to do without a loan if your business is just starting out. Equipment financing may be the most effective way to keep your business running without shelling out the full price all at once.
What is equipment financing?
Equipment financing refers to a loan used to purchase business-related equipment, like a restaurant oven, van or copier, as ValuePenguin states. Equipment loans are typically reliant on periodic payments that include interest and a principal over a fixed term. As security, the lender may require that the equipment be used as collateral against your debt. Financing for a physical asset in this sense can be a more cost-effective method, with lower risk, than other methods of financing. (Especially considering that once you’ve paid back the loan, the equipment belongs to you.) However, it is important to carefully look over the loan terms to understand your risk. Equipment loans, depending on the size, may require a personal guarantee or a lien on additional business assets. Failing to pay back the loan may result in the repossession of these personal or business assets.
In an example of using equipment financing, one may need a significant amount of equipment to open their own coffee shop - like espresso machines, ovens for baked goods and furniture. If the equipment costs $75,000, and you are approved for an equipment loan equal to 80% of the equipment’s cost - $61,500 - your out-of-pocket expenses will be $13,500. This leaves you with the initial extra cash that would have gone to equipment purchases to put toward rent, marketing and permits.
Why use equipment financing?
For those considering utilizing equipment financing, they may be wondering why this is the best method for obtaining their assets. If the following apply to you, you may be a good candidate for equipment financing:
- You need expensive equipment that you can’t afford or don’t want to purchase up front.
- You want to maintain cash for other aspects of your business, like marketing or expansion, while still being able to possess trustworthy equipment
Another bonus for equipment financing is that equipment financing lenders frequently offer flexible financing terms and don’t always require down payments or impressive credit scores. Like auto financing, having collateral on a physical object means that lenders can easily claim ownership of the equipment and reduces their risk.
What businesses can get a business equipment loan?
The Equipment and Financing Association (ELFA) found that 78% of U.S. businesses across all industries utilize financing methods for equipment purchases like loans, leases and lines of credit. Here are some common business-related items that are frequently financed with equipment financing:
- Agricultural or farming equipment
- Trucks and business vehicles
- Manufacturing machinery
- Medical imaging equipment
- Restaurant ovens and ranges
- Construction equipment
- IT equipment, servers and software
Equipment leasing vs equipment financing
While both of these achieve the same goal - providing you with equipment needed to run your business - there are significant differences to consider between the two.
Unlike equipment financing, leasing equipment does not require down payments or collateral, and may have lower monthly installments than an equipment loan. Leasing is popular if you anticipate needing to trade out the equipment frequently, or don’t have the capital for the down payment required for the loan. Leasing is also more likely to cover the costs related with shipping and installation. The fundamental difference is that instead of borrowing money to purchase the equipment, you’re paying a fee to borrow the equipment. The leasing company is maintaining the ownership of the equipment but allowing you to use it.
Leases generally carry lower monthly payments than loans but can wind up being more expensive in the long run. First, you may never end up owning the machinery or equipment, and leases generally carry a higher interest than a loan would. There are a lot of different options for leasing, though, some of which may lead to owning the equipment.
When deciding between the two, business owners just need to decide if they can pay for a down payment, how long they’ll need the equipment for and how soon the equipment will become obsolete.
For more information on equipment financing, and how it can benefit your business - contact Select Funding.