What Is Equipment Financing: How To Purchase Hard Assets With Loans & Leases
What is business equipment financing, and where can you find the best way to finance equipment for your small business? Find out here.
Equipment financing isn’t the only way for businesses to purchase equipment and hard assets, but it offers some distinct advantages over more general types of financing.
Below, we’ll cover the basics of equipment financing, including the different types, and where to find the best equipment financing companies.
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What Is Equipment Financing?
Equipment financing refers to types of business loans designed specifically to acquire assets. The assets, in turn, serve as collateral until the account is settled.
“Equipment” can be defined fairly loosely in practice, but in almost all cases, it describes some kind of tangible asset used in your business operations. These are things like vehicles, machines, computers, appliances, and furniture. It does not typically include debt servicing, labor expenses, real estate, buildings, etc.
How Equipment Financing Works
Equipment financing generally comes in the form of an installment loan, and less commonly as a non-revolving line of credit.
On the surface, equipment loans are a lot like any other kind of medium-to-long-term installment loan. If you successfully apply, you’ll receive a lump sum of money. Your loan will accumulate interest over time at either fixed or variable rates, and you’ll make regular payments over the loan’s term. In the case of equipment loans, this is usually a monthly payment. The major difference is that the equipment you’re acquiring serves as collateral for the loan. In this sense, equipment loans are secured loans vs unsecured loans.
You’ll generally want to know what equipment you’re planning to buy when you apply for the loan, including the vendor you’re planning to buy it from. Depending on the lender, the money may or may not be paid directly to the vendor instead of passing through you
Equipment Lines Of Credit
One variation on the equipment loan you may come across is the equipment line of credit. The purpose of an equipment line of credit is identical to that of an equipment loan, it just provides you a bit more leeway.
An equipment line of credit is a non-revolving line of credit extended to a borrower to purchase equipment. Instead of approving you for a specific purchase, it grants you a credit limit that you can draw on to buy items within an approved window of time. They’re a little more flexible in that you don’t necessarily need to know exactly what model and vendor you’re choosing when you apply for the loan.
After you’ve made your purchases and/or the buying window expires, an equipment line of credit will effectively become an equipment loan, accruing interest over time.
Does Equipment Financing Require A Down Payment?
Traditionally, it was common for equipment loans to require a 15% down payment (or thereabouts), but it’s possible to find equipment financing that covers the total cost of the asset, especially among online lenders.
Keep in mind that shipping and delivery of the equipment and other “soft costs” may not be included. There are, however, exceptions to these rules if you’re determined enough to find them.
Equipment Financing Pros & Cons
- Built-in collateral limits risk to your assets
- Equipment loans tend to have longer term lengths
- Secured loans often have favorable rates compared to unsecured
- Equipment financing can have tax advantages, both in terms of interest payments and depreciation
- Less versatile than working capital loans
- Qualifications may be higher than with some unsecured loans
- A down payment may be required
- It may take some effort to find a lender who finances the type of equipment you’re buying
So why would you want an equipment loan over another type of financing? Equipment loans have a nifty feature built into them that reduces risk to both the lender and the borrower, which in turn means better rates and terms on average. Normally if you want a secured loan, you have to put up collateral — property, a cash deposit, etc. — as security for the loan. The lender can then repossess your collateral if you default. With equipment loans, the equipment you purchase with the loan becomes the collateral. If you default, the lender collects the equipment and resells it and you don’t have to worry about them coming after your house.
Equipment Financing VS Equipment Leases
Equipment financing generally refers specifically to equipment loans, but it’s not the only way to finance equipment. Leasing can also be an effective way to acquire equipment. When should you consider a lease vs a loan?
Traditionally, leasing meant something like “renting,” but–and here’s where it gets really confusing–leasing has evolved to include both rental agreements and “equipment financing agreements.” Equipment financing agreements, or capital leases, are used to purchase equipment rather than rent it.
In most cases, an equipment loan will have a lower rate than a similar equipment lease, but leasing companies can often accommodate a greater variety of circumstances than a loan, including lessees with bad credit. Equipment lease financing is also more likely to cover soft costs like delivery and installation. If the type of equipment you’re looking at becomes obsolete quickly, you may be better off leasing it.
Equipment Financing Rates & Terms
Equipment financing rates, like other forms of lending, can vary greatly depending on the lending institution and profile of the borrower. Additionally, the type and cost of the equipment may affect your repayment term length.
Typically, however, you’re looking at:
- An APR somewhere between 3.5% and 30%
- A term length of somewhere around five years, depending on the typical lifespan of the equipment
Where To Get Equipment Financing
Now let’s take a look at where you can go to get equipment financing.
Final Thoughts: Business Equipment Financing
Equipment financing can be an excellent way to buy critical equipment for your business and keep it up-to-date.