What Do You Need to Know About Equipment Financing?
Equipment financing is used specifically for large equipment purchases – like industrial kitchens, company vehicles or even party inflatables. Getting an equipment loan is usually the most convenient way to purchase new equipment for your business. Usually, it’s an inevitable purchase – if your equipment is outdated you need to update it, or if you’re starting a business, you certainly need equipment. Getting a loan makes those purchases just a little bit easier.
You use equipment financing loans the same way an individual would use a car loan. You receive the sum of the loan upfront and then pay it back via monthly payments. New equipment can help your business bring in more revenue – whether it be a van to help deliver catering or another oven to meet higher demand. Handing over the cash for these purchases can set you back significantly, and that’s what makes equipment financing an attractive option for expanding, starting or updating a business.
If you’re going to a large equipment vendor, like John Deere, they’ll usually offer in-store financing for your business. Smaller or less-broad vendors will not, so you have to go through a bank or other lender to get the funds you need to pay the vendor up-front.
Do You Qualify for Equipment Financing?
Most businesses in good standing can qualify for equipment financing loans. Since the equipment you’re financing acts as the collateral, these loans can be easier to secure if your credit is less than stellar. Lenders are interested in securing a loan, so when you’re financing equipment, they’re often not as concerned with your borrowing history because if you can’t pay the loan back, they’ll just seize the equipment. This way, they don’t lose any money, so they’re more likely to be a little generous with their lending. The details of how much the loan will be for and for how long depends on the type of equipment and how much it costs. If you plan on investing in a piece of equipment that will retain its value with time, then lenders will often be willing to work with you, even if you don’t have the best finances.
Be aware that the term length depends on the type of equipment and its expected lifetime. Most lenders will not extend the loan payments past the lifetime of the equipment – they want it to be a tangible asset that’s worth something should they have to repossess it.
How to Apply
Like most loans, you’ll need to provide the financial health of your business along with your credit score. Most equipment lenders will also ask for information about the equipment you’re looking to buy and a quote of how much it will cost. The documents you’ll need are:
- Driver’s License
- Voided business check
- Bank statements
- Business tax returns
- Credit score
- Equipment price quote
What’s the Difference Between Equipment Financing and Equipment Leasing?
Some equipment sellers offer the option to lend equipment directly to their customers and charge a monthly rental fee, much like renting an apartment. With this option, you can only use the equipment while you’re paying for it, and no matter how long you use and pay for the equipment, you don’t own it. This is a good option if you only need equipment – like a forklift or a van – for a shorter period of time.
If you chose to finance equipment with a loan, you’ll own the equipment when you’re done paying for it. If you know your business will need the equipment for a while, financing with a loan is usually a better investment.
What Will Equipment Financing Cost You?
The appeal of equipment financing is that it doesn’t require you to pay the steep price for equipment upfront. It gives you a way to pay it off in increments. Because of the interest generated by getting a loan, you inevitably end up paying more for the equipment than it actually costs. Part of this is an investment – if you choose to finance the equipment you really need, then you’ll receive more output and money because of it. Part of it, however, is the fee you have to pay for convenience – lenders are making this money more accessible to you, and expect you to pay them for it.
To help break equipment financing down, here’s an example: Let’s say your restaurant needs a new set of dining-room furniture. The expected price of this new furniture is around $12,000 total for all the tables, chairs and booths. After you get approval from a lender, you use that money to purchase the furniture and agree to pay 12% interest back to the lender, along with the money from the loan. Because technology doesn’t improve very quickly when it comes to dining furniture (like it does with computers), the value of the furniture isn’t expected to depreciate significantly over the next few years, so the lender gives you five years to pay the loan off.
$13,440 is the total amount you’ll have to pay back, making your monthly payments $224 for five years. After it’s paid off, you own all the furniture.
Things to Consider
In order to know if equipment financing is the best option for your business, you have to understand your business financials and opportunity costs. If you planned for these costs or have the money on hand, sometimes it’s worth it so you don’t have to pay the extra money in interest. It’s also an option to wait and save the money, but if you need the equipment immediately, saving isn’t really an option. For many new or small businesses, handing over $12,000 in full isn’t a possibility. It will set them behind significantly, and hinder their ability to start or grow their business.
This can all sound very overwhelming, but that’s why we’re here. When you sign up with FaasFunds, we analyze your business needs and finances and figure out if equipment financing is the best option for you. We’ll also link you up with an industry expert to help you through tough financial decisions. Navigating the financial world is tough, so make it easier with FaasFunds.