As the name suggests, it is a loan given specifically for the purchase of business equipment. When there is a shortage of capital to buy them, the owner approaches a lender like a NBFC for a loan. Once financed, the business owner makes regular payments to pay off the loan and once the debt is completely repaid, he/she becomes the owner of the equipment.
In equipment financing, the equipment itself serves as collateral and thus, it becomes a secured loan. It helps in getting better loan terms compared to personal loan but in case of a default, the lender is entitled to seize the equipment.
Apart from the loan, there is the other option of taking equipment on lease. It is similar to paying rent for your office space. But in that case, you never become the owner of the equipment. Opting for loans might just be a better option because it is easier to get it financed and the rate of interest is also lower. If one opts for a loan, there are several ways to finance equipment depending upon business credit scores, experience in business, annual business revenues, loan amount required, and preferred repayment terms.
Line of credit: It is similar to how a credit card works. The lender limits the maximum amount that the borrower can take. It is a more flexible version of the general business loan as in this case, the borrower can draw a certain portion of capital that he needs from time to time and pay only the interest on that amount. Best suited for businesses that require equipment quickly.
Working capital loan: The best loan option for the purpose of financing short-term operational needs of the company as it is immediately financed. These work as corporate debt borrowings for the companies that do not have sufficient funds and assets in hand for daily operations like paying salaries. These are flexible with repayment and interest rates.
Equipment loan: As explained earlier, companies would always need to buy and maintain equipment for growth and there are lenders who are willing to finance the equipment up to 100 percent.
Term loan: It is a loan from a lender that has a specified repayment schedule with either a fixed or floating interest rate. Business owners use the cash from a term loan to purchase equipment. The loan requires collateral to reduce the risk of default and thus, it is best suited for businesses with a steady flow of income.
Business loan: These are loans taken to meet the urgent needs of the business including the purchase of machinery.
Business credit card: It is a credit card meant for use by a business rather than an individual. It is available to both small and big businesses and can help in getting the smaller equipment as business credit cards have lower limits compared to other types of equipment loans. However, they offer cash backs and travel points on regular purchases.
Take a lease: One would never own the equipment if he/she opts to get it on a lease. In the long run, it proves to be less beneficial when compared with loans. However, in the case where the equipment is required for a small period of time or chances of the equipment getting obsolete in a few months, taking a lease would be prudent.
Points to consider before applying for equipment financing
Requirement: Firstly, one must be sure that he/she needs the machine for the production of goods and assess if the investment will pay rich dividends.
Research: A thorough market research on the cost and quality of the equipment needs to be done. Then one has to look for the right lenders who are offering the most favorable loans.
Evaluation: After knowing the cost of the equipment and loan terms available, evaluate the cash flow of your business and see if you are in a good shape to take a loan. If yes, then decide upon the loan and down payment size, rate of interest, repayment time, and size of installment judiciously.
Credit score: A good credit score comes first when applying for a loan. Make sure you have a positive credit rating in order to get loans at lower interest rates and see what is been put on the line in the name of collateral.
Equipment financing is enabling business owners to keep the show going even when capital is short. The presence of the tools and technologies that are relevant to your business activities plays a huge role in determining the success and failure as a business owner but unfortunately, acquiring some equipment can be an expensive affair. At this stage, equipment financing can ease your life.
What are the typical requirements for equipment financing?
Requirements usually include a good credit score, financial statements, and a business plan.
Can startups get equipment financing?
Yes, startups can qualify, often with a strong business plan and personal guarantee.
Are there tax benefits to equipment financing?
Yes, lease payments or loan interest may be tax-deductible, providing potential tax savings.
How does equipment financing affect my business credit?
Timely payments can improve your business credit score, while missed payments can negatively impact it.
Can I finance used equipment?
Yes, many lenders and leasing companies finance both new and used equipment.
Finance Lease vs. Operating Lease: Which is Better for Equipment Financing?
Choosing between a Finance Lease and Operating Lease for equipment financing depends on your business needs. A Finance Lease is ideal for long-term use and ownership transfer, while an Operating Lease offers flexibility and lower upfront costs.