Equipment Finance is a way for businesses to procure equipment on credit. An equipment finance deal is similar to a line of credit where a company borrows money against the equipment. Once the business uses the equipment, it has to repay the loan amount with interest. This process is repeated over a specified period. A business needs to make repayments regularly within a specified period or be blocked from accessing further credit.
An equipment finance deal can be viewed from many different perspectives; as a means of securing equipment, as a source of short-term financing, as part of larger business operations, and securing long-term equipment financing. When you look at equipment financing from these different perspectives, it is possible to see the benefits of equipment leasing. For example, when your business operations require equipment for daily operation, you can get equipment loans from equipment leasing companies. As equipment costs increase, so does the cost of equipment leasing. Still, if your business needs the equipment frequently, then equipment leasing could provide significant cost savings over other financing options.
Leasing allows you to access the capital markets faster. As equipment finance deals are generally secured against the equipment, you can access capital markets quickly. It is much easier to obtain equipment financing through leasing than through conventional credit vehicles. Another advantage of leasing is that you do not commit yourself to anyone supplier. You can lease any piece of equipment you need for your business operations.
When you enter into an equipment finance agreement, you are usually required to sign a contract or a binding contract (a lease). The contract/loan details should be in writing. It is advisable to have expert advice before entering into any agreement (especially if you are new to the equipment leasing marketplace). It is essential to understand all the risks and terms, and conditions of the equipment finance agreements before signing one.
A typical equipment finance loan involves one of two scenarios: a vendor-secured or an unsecured lease. In a vendor-secured lease, you can obtain business equipment through a sale or exchange of a tangible asset. This means that you sell part or all of your tangible assets to obtain equipment finance. Typically, this type of lease has lower interest rates since the tangible asset value is higher.
An unsecured equipment financing option is often available for manufacturers or suppliers who produce finished goods. Under this scenario, a supplier leases a part of the manufacturing process until the entire supply is sold. The payment terms depend on the duration of the lease, the value of the tangible asset, and the business’s financial situation. Sometimes, smaller companies obtain equipment finance without requiring a sale or exchange of a tangible asset.
There are several types of equipment financing options available. The most common is a bank loan, which usually requires collateral to secure the funds. Most banks require at least some collateral as security for the loan, such as real estate, cars, and equipment that generate cash flow. Some banks offer equipment leasing as an alternative to bank loans.
An increasing number of sellers and manufacturers provide equipment financing as an add-on service to their normal sales and marketing services. The seller will finance the equipment cost until the buyer has received all of his/her funds or until the seller is paid in full for the equipment. This type of financing is referred to as “add-on” equipment financing. Many buyers find that this option provides them with a convenient way to obtain necessary equipment when needed, without having to wait for a bank loan, sell their existing inventory, or obtain another financing. This option is ideal for buyers who have no income from a job, are self-employed, retired, or are not currently employed.