When and How to Use Equipment Financing

Numerous business owners encounter hardship in keeping the right equipment necessary to ensure success. It is crucial to have the right tools to do the job for a business to succeed, but it can be expensive to navigate the finances to equip business with those tools.

Business owners can use their operating cash flow when it comes to buying equipment and pay large sums upfront to obtain the equipment they need, but there is also a wide range of equipment finance programs available.

Equipment financing gives business owners leeway by extending payment terms for large-scale equipment purchases over time instead of paying it all at once. A guide on when and how to use equipment financing is up next.

When and How to Use Equipment Financing
Image Source: Fams

Equipment Financing

As with most conventional credit options, equipment loans are generally a lump sum of money borrowed from a business lender. However, there is a limitation with equipment loans— specifying that the funds have to be used for purchasing equipment.

Another aspect is that the equipment itself is used as collateral to guarantee the borrowed amount. This is a bonus for many business owners who don’t have to put up other collateral types to obtain financing.

The lending agreement focuses on the equipment’s value over the lending period, instead of the borrower’s credit history, which is often more important with other loan types.

Equipment financing is advantageous to business owners because it gives them the ability to purchase the most reliable and effective equipment for the full equipment cost without excessive up-front payments. There are two types of equipment financing.

Equipment Lease

An equipment lease is equivalent to a rental agreement. The equipment company retains the equipment title while paying them a monthly fee.

In certain situations, a company may have a third party where you can make the payments, too. You may prefer to purchase the equipment or return it at the end of the contract.

Equipment Loan

You’ll get a lump sum of money in an equipment loan to buy the equipment. The lending firm accounts for the entire cost of the equipment.

Your small business maintains the title. You then make payments to the lender until the loan is paid off.

When and How to Use Equipment Financing
Image Source: LendSpark

Application Process

Equipment financing application for those that cost up to $200,000 is extremely fast and straightforward. The overall process can also be completed within a day, from application to closing.

Costs under $200,000 are called “small ticket” equipment purchases. For this, the application process is dictated by the kind and price of the equipment, and also the credit score of the borrowing company.

If a borrower has strong personal credit, the company has long been in good standing, and the equipment being financed will maintain its value, then borrowers should experience a speedy application process.

The process is somewhat more complicated for equipment which costs more than $200,000, or “big ticket” items. Usually, the lender would need to gather more company information and details of the type of equipment, and the process may take up to a week or two.

Bottom Line

Equipment financing for business owners provides working capital increase, and the opportunity to purchase the best equipment. It also helps with tax benefits involved with financing equipment, the opening up of other credit lines, and has a simple application process.

All businesses require sufficient equipment to keep up and run. If you’re a small business owner but cannot afford new equipment, options are available. There are a lot of ways to get funding between loans and leases. When it comes to financing equipment, it’s all about finding the type of financing that best fits the company.

Disclaimer: There are risks involved when applying for a loan. Consult the lender’s terms and conditions page for more information.