You may be wondering if equipment financing is a better option for your business, especially if it’s starting up. In our ‘guide’ is a brief overview of how equipment financing works and what it entails for both the borrower and lender.
Equipment financing can be a simple and easy way for businesses to get the equipment they need without having to worry about large up-front costs. Business equipment is tangible assets. However, it’s not real estate. It is other tangible assets that may include:
- Workplace furniture – office, workshop and specialised fit-outs
- Computer and Tech hardware and software
- Manufacturing equipment
Medical equipment also qualifies for equipment financing. For example, you may be setting up a new dentistry practice and need the dentist chair, lights, x-ray and sterilization tools, plus the actual instruments like the probe, scaler and so on.
Equipment Financing Guide
Here are answers to frequently asked questions on equipment financing.
Equipment financing and how does it work?
When you take out equipment finance from a lending institution, it means you have borrowed money to buy or lease expensive machinery (i.e., bulldozers).
The borrower pays an interest rate based on their credit score for the duration of the contract.
The repayments are monthly and include principal and interest, and when it’s repaid, the equipment belongs to the borrower. Before that time, it is used as collateral for the loan.
The lender may charge additional fees for administration depending on how much money you need and how quickly you want access to the equipment.
Shop around for the best loan terms.
How do you finance your business through equipment leasing?
The equipment leasing process is designed to make it easier for business owners with limited access to capital.
For example, a technology start-up may need the best in new computer hardware and software for their offerings. With the equipment leasing loan, the startup avoids the immediacy of full payment to use the computers.
The lending institution (loan provider) will require you to provide a down payment on the cost of the lease or equipment purchase price.
Most leases offer an option for “buy-out” at any time during your contract term, meaning if you can afford what’s leftover after one, two, three years (or whatever agreed upon period), you get all of that equipment!
Equipment leasing vs. taking out a loan or using cash
If you’re looking at financing equipment, it’s important to understand the benefits of leasing versus purchasing. One way to think about this is that while both options involve some measure of borrowing money, there are no long-term commitments (the purchase option).
A business owner may also find themselves in a situation where they need new equipment quickly–and if it does not make sense financially to buy for cash or take out a loan, but they cannot wait six months for delivery, then an equipment lease might be right for them.
Leasing vs. buying
There can be significant tax advantages when leasing over purchasing.
For example, you don’t have the headache/expense of maintenance or repair. Plus, you may be able to get a better lease rate than you would on an equipment purchase loan.
With purchase, you don’t have any concerns about how long you’ll own your equipment before it needs to be replaced or retired because there is no end date on ownership through purchase.
If you have to pay out the lease in one large sum, it can add pressure financially.
Some leases are for concise periods of time – less than five years, and if your financial situation changes or business needs change after five years, the equipment will need to be replaced. Leases typically have a termination fee for the early release of the agreement.
Common misconceptions about equipment financing
There are two types of leasing –
- operating leases – which typically come with lower monthly payments, but higher up-front costs.
- finance leases – where ownership transfers over at some specified point during the agreed term and has more flexible terms when it comes time to renew.
With finance leases, the most common misconception is that there’s no end date on your ownership. Technically you’re purchasing it upfront through a finance lease, paying off instalments each month rather than making all of them upfront like you would with an operating lease.
Small Businesses Tips
Below we have some hints on how to get the most from using equipment financing.
- Pay for equipment you need now and refinancing it when the price of equipment drops or your business grows.
- Always prepare for future growth by getting a loan on assets without having to make all payments upfront.
- The equipment you need doesn’t have to be new, but the type of equipment will dictate what amount you can borrow and how long it’ll take for your company’s cash flow to catch up with monthly payments.
When companies purchase assets outright, equipment leases are the best way to avoid high monthly payments.
Equipment financing is a good option for businesses that don’t want to use their working capital or other investment, plus you can avoid interest rates on unsecured borrowing.
Leasing allows people and businesses that cannot afford new equipment or do not have enough capital upfront to enjoy newer technology quickly – at an affordable price point.