Many businesses think that pursuing a regular business loan to finance the growth of their business is always the best option, but a more targeted approach can often deliver a better result. When the need of the business requires purchasing or refinancing equipment (whether an individual item or bulk equipment), then the avenue many businesses should consider exploring is equipment financing.
Let’s take a closer look at equipment financing, and explore what it is, how it works, and where you can find it.
What is Equipment Financing?
At its core, equipment financing is a financial arrangement that allows businesses to acquire the necessary equipment without paying cash for the full purchase price upfront. Instead, a lender provides a loan, contract, or lease to cover the equipment’s cost, which the business repays over a specified period.
Equipment can be considered anything from a coffee machine for a restaurant, to a tractor for a farmer—and everything in between. Before selecting the best financing option for your business, think about what your actual capital need is.
How Does Equipment Financing Work?
Application and Approval
- Businesses initiate the process by applying for equipment financing. Many equipment lenders only require that you complete a short application when applying for smaller financing sizes up to $150,000 and may not even require that you submit financials or bank statements. Funding can even occur in as fast as a few hours or days.
- Lenders will evaluate the business’s financial health, creditworthiness, and the equipment’s value, along with the credibility of the vendor or supplier selling the equipment. Some lenders will even finance used equipment sold from a private-party seller.
Loan or Lease Agreement
- Once approved, the business and lender enter into a formal agreement outlining the terms. Many lenders don’t consider equipment financing a loan, but an agreed upon stream of payments, known as an equipment contract.
- The business can choose between a loan, where they own the equipment after repayment, or a lease, where the lender purchases the equipment and leases it back to the business owner.
Repayment
- Repayment terms usually range from 2 to 10-years, but often align with the equipment’s expected useful life. Some equipment may not be financeable if it has reached a certain age or mileage amount, so in that case working with a flexible online business lender may be your best bet.
- Weekly, monthly, semi-annual, or annual payments cover the principal amount, interest, and any applicable fees (specialized equipment lenders offer flexible repayment schedules).
End of Term Options
- For leases, businesses may have options like purchasing the equipment, upgrading to newer models, or returning it. For loans or contracts, the business will own the equipment at the conclusion.
Where to Find Equipment Financing?
Traditional Banks
Many traditional banks offer equipment financing and usually offer the most competitive rates and terms, but are also usually the most conservative when it comes to qualifying criteria.
Specialized Lenders
Numerous lenders specialize in equipment financing, understanding the unique needs and challenges of different industries. These types of lenders tend to offer unique financing structures like 0% down payment options, prepayment discounts, new and used equipment financing, and custom payment structures.
Online Lending Platforms
In the digital age, online platforms provide a streamlined application process, often delivering faster approvals with less documentation required. If you need fast funding to take advantage of an opportunistic equipment purchase, then a top online business lender may be right for you.
Equipment Vendors and Suppliers
Some vendors and suppliers offer in-house financing or have partnerships with financing companies, simplifying the acquisition process. However, these vendors and suppliers often go through the same banks and finance companies that you can access directly, often at a lesser cost of capital.
Equipment Financing vs. Business Loan
When you receive a business loan you are required to pay interest on the entire amount of funds borrowed, even if you don’t use it all and it sits in your bank account. Business financing can require more paperwork, can sometimes be more costly than equipment financing, and can take longer. Business financing can be extremely beneficial to your business if you have multiple short-term or long-term growth needs, but if your specific requirement is to purchase or refinance equipment for your business, then equipment financing is the right choice for you.
Conclusion: Match the Financing with the Need
If you think that your business doesn’t use equipment or may not be eligible for equipment financing, then you are likely wrong. Are you a service-based business owner thinking that you have no equipment? What about the computer you work on every day? Are you a rideshare or limo driver? What about the vehicle you are transporting customers in? Whether you know it or not, your business likely uses equipment and next time you need more of it—fast, long-term, affordable equipment financing may be the best choice for you.
Interested in accessing fast and affordable equipment financing? Contact our recommended lenders South End Capital and OnDeck.