What is Equipment Financing?
Equipment financing is commonly used to purchase vehicles, equipment or machinery needed to assist with the running of a business. In this article Commercial Lending Partners explores the definition of equipment finance, what it is used for, and how to access equipment finance for your business.
What is Equipment Finance?
Equipment finance allows companies to acquire equipment and machinery to run their operations without having to pay upfront. This type of financing is ideal for businesses that may require expensive equipment to function, but lack the financial resources to make the purchase outright. This is common for start-up businesses, businesses with large machinery, tech companies, and vehicle companies.
Equipment financing can come in many different forms so it is important to understand your business needs and how an equipment loan will be structured before committing.
How does Equipment Financing Work?
Equipment financing works by providing businesses with the working capital they need to acquire the equipment and machinery. The lender will provide a lump sum of money that the business use to purchase the equipment outright, and the business will make regular payments back to the lender over a set period of time, with interest.
Pros of Equipment Loans
Equipment loans can offer several advantages for businesses seeking to acquire expensive business equipment. These include:
- Equipment loans are typically easier to qualify for than other types of business financing, such as unsecured bank loans, as the equipment serves as collateral for the loan.
- They typically have competitive interest rates, making them a cost-effective financing option.
- Equipment loans offer predictable monthly payments, allowing businesses to budget accordingly.
- At the end of the loan term, the business will then own the equipment outright retaining the value of the item in the business.
Cons of Equipment Loans
While equipment loans have several advantages, they also have some drawbacks that businesses should be aware of when considering them as a financing option.
- The purchased equipment serves as collateral for the loan, meaning that if the business is unable to make payments the equipment may be seized.
- Equipment loans sometimes require a down payment, which can be a significant upfront cost for some businesses.
- There are fixed payment terms, meaning that if the business is unable to make payments, it may face penalties.
What is the Interest Rate for Equipment Loans?
The interest rate for an equipment loan can range from 7% to 15% or more. The interest rate may be fixed or variable, depending on the lender’s policies and the terms of the loan agreement. Before choosing an equipment loan it is essential to compare rates from different lenders.
Where to get Equipment Loans?
There are several places businesses can acquire equipment or machinery finance. Some common sources include:
- Mainstream banks and commercial lenders are the main suppliers of equipment funding.
- Online lenders will offer a faster application process and funding, but often higher rates.
- Equipment dealers may have financing options to purchase equipment from their inventory.
- Alternative lenders such as peer-to-peer lending platforms, can be an option for some businesses that do not fit traditional finance options.
Businesses should carefully consider their repayment ability, and make sure that the loan terms align with long-term financial goals. For professional assistance with your lending needs, get in touch with us today.