Equipment Financing: What Is It and How Does It Work?
Picture this: Your copy machine just made its last copy but you don’t have the funds to replace it. You need this equipment to complete daily business tasks, so what do you do?
Equipment financing is a great option for new businesses or those struggling with cash flow.
What is equipment financing and how does it work? Keep reading to find out.
What Is Equipment Financing?
Equipment financing is a type of small business loan designed for purchasing the supplies you need to run a business. You can use an equipment loan to purchase the following:
- Large vehicles
- Office furniture
- Copy machine
Every business differs in what equipment they need to run a company. You can find SBA loans that specifically cover equipment financing.
How Does Equipment Financing Work?
When you take out an equipment loan, you have to make periodic payments that include principal and interest over a fixed term.
A lender might require a lien on the equipment as collateral against the debt you currently have. This is similar to how auto loans work.
After the equipment is paid off in full, you’ll own it without the lien.
A lender can also use other business assets as collateral. If you fail to pay the loan payments, the lender can repossess the assets put up for collateral.
Review the loan terms before accepting financing to ensure you understand the risks involved.
Equipment Financing vs. Equipment Leasing
Equipment financing for business is common for owners who want to eventually own their equipment. On the other hand, equipment leasing is where you pay the owner of the equipment periodic rent for using the materials.
You’ll agree upon a period of time in which you’ll return the equipment at the end of the leasing term. You can also agree on renewal terms or buy the equipment to own it.
The qualifications for leasing are more lenient than financing. However, if the equipment is always going to be necessary to your business, the continuous leasing payments will be more costly over time.
Equipment Loan Qualifications
Every lender has their own requirements when it comes to giving out an equipment loan. Although underwriting standards vary, there are general qualifications that lenders look at.
Business finances, credit score, and debt are important factors in obtaining equipment loans.
Lenders might require that you provide a business plan describing a proposal for future growth. You might have to show them any of the following documents:
- Profit and loss statement
- Balance sheet
- Cash flow statement
These statements will help lenders assess the financial strength of your business.
Is Equipment Financing Right for You?
If you need equipment to run your business but can’t afford to buy tools outright, equipment financing is a great option. Choosing equipment leasing over financing is more costly in the long run.
You can use equipment financing to purchase a variety of equipment depending on what industry you are in. Consider your finances and credit score to help you qualify for loans.
For more articles like this on business, check out the other posts on our website.