What is Equipment Finance Loan? If you own a small enterprise, you understand how critical it is to obtain, upgrade, or consider replacing the equipment you have to perform your everyday tasks quickly and affordably. Buying equipment outright can put a significant strain on your cash flow, and yet equipment financing can be a viable option for maintaining your business running smoothly or even expanding to meet rising demand.
We’ll go over how Equipment Finance Loan works, what rates and terms you can expect in today’s market, the basic qualifications for these loans, and where you can get one.
What is Equipment Finance Loan?
A loan that is used to purchase business-related equipment, like a restaurant oven, vehicle, or copy machine, is referred to as equipment financing. Once you take out an equipment loan, you must make periodic payments which include the principal and interest over a set period of time.
The lender may necessitate a lien on the equipment as leverage against your debt as security for the loan, comparable to how an auto loan works. You own the equipment free and clear once the loan is paid in full. In addition, the lender may place a lien on some of your other business assets as well as require a personal guarantee.
If you do not repay your loan, the lender may expropriate your business assets and, if you provided a personal guarantee, your personal assets as well. To understand your risk, you must carefully examine the loan terms.
For example, if you want to open a restaurant, you will need a lot of equipment, such as a commercial range, ovens, and a refrigerator. Assume the equipment costs $75,000 in total: You apply for and are authorized for an equipment loan for 80% of the cost of the equipment, or $60,000.
This means that your out-of-pocket expenses will just be $15,000, and you will have $60,000 in cash reserves to cover all of the other costs associated with starting a new business, such as advertising and marketing, permits and licenses, and the cost of equipment.
Leasing of equipment
Equipment leasing, on the other side, is when you pay the owner of the equipment on a regular basis for the use of the equipment over a set period of time. Unless you both agree on approval terms or a buyout, the equipment is brought back to the owner at the end of the leasing term.
Leasing qualifications are generally less stringent than financing qualifications. If the equipment is critical to your business, however, the ongoing payments on lease agreement equipment without the specter of future outright ownership might prove to be an expensive option.
Eligibility for an Equipment Finance Loan
Lenders’ requirements for obtaining an equipment loan will vary. The overall qualifications that financial institutions will take into account when making a credit decision are as follows. However, lending practices vary and must be thoroughly researched before selecting a lender to make sure you fulfill their minimum requirements.
Your business and personal credit scores will be considered when applying for equipment loans. If you don’t know what your existing credit score is, you can look up your business and personal credit scores online. The higher your credit scores, the more probable you are to be approved for a loan with better terms.
In addition to your credit score, lenders may request a business strategy that outlines your company and includes a detailed plan for future growth. The basic goal is to provide prospective lenders with a thorough overview of your company. The number of years you have been in business and your annual revenue are critical factors to include in your business plan. Some lenders may have basic standards in this regard, like 2 years in business with yearly revenue of more than $250,000.
Lenders may also necessitate a balance sheet as well as a cash flow statement in addition to a statement of profits and losses. These should show the revenue coming in and the expenses going out of the business. These statements assist lenders in determining your financial strength.
Because lenders are involved in your personal finances, you may also need to provide some personal documents. Past tax returns, bank statements, or a catalog of all your personal debts may be included.
Advantages and disadvantages of equipment financing
Here’s a quick rundown of the various factors to consider if you are thinking about financing business equipment:
Advantages of Equipment Finance Loan
Can assist you in establishing business credit
Can be a cost-effective option, particularly if you choose a secured loan.
Can help you have the equipment you really need for your business to grow.
The disadvantages of Equipment Finance Loan
More costly than saving up to purchase the equipment outright.
Payments can stymie your company’s cash flow till the loan is paid off.
If you can’t make the payments, it can seriously harm your credit and even put you out of business.
The bottom line
It is critical to understand that an Equipment Finance Loan is not your only option for raising funds for your business. Take into account a business credit card, merchant cash advance, invoice factoring, or angel investing if you’re purchasing relatively inexpensive equipment. Each has advantages and disadvantages in terms of terms, turnaround time, and qualification requirements.