Equipment Financing
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What is Equipment Financing?
Equipment financing is a viable option for businesses that need to purchase or lease much-needed equipment, such as company vehicles, furniture and fixtures, heavy equipment, and other equipment and machinery specific to your industry. Instead of making a one-time purchase upfront, equipment financing companies help you to spread out the payments and maintain positive cash flow.
Medical, construction, agriculture, transportation, restaurants, hotels and other equipment-reliant industries benefit the most from equipment financing. Qualifying for equipment financing is easier compared to other loan options because the equipment you’re going to purchase serves as collateral for the loan.
Two Types of Equipment Financing
Equipment Loans
An equipment loan is a lump sum of money that a business owner borrows from a lender, like most other multi-year term loans, with the restriction that the money must be used for an equipment purchase. Much like a car loan or other personal loans, a proprietor uses small business equipment loans to ease the burden of large purchases by allowing them to make smaller payments over the length of the loan term.
Like any traditional term loan, the lender and borrower will set up the terms for the equipment loan. Lenders and borrowers will negotiate the best equipment loan rates and length of its terms to purchase the equipment you need, and the loan is paid back like any other loan. At the end of the period, the borrower will own the equipment.
Equipment Leasing
Equipment leasing works similarly to a mortgage or a traditional car lease. Your small business and the lender negotiate terms and set up monthly payments for the equipment that your business needs and determine a set length of time. Essentially, your small business is renting the equipment from a lending company, while making payments over the terms of the lease.
By leasing, rather than having to buy expensive equipment, your small business can have access to upgraded equipment without having to make the expensive purchases outright. Better equipment makes work easier and faster for your employees, which improves quality and productivity for your business.
After making all of the payments for the terms of the lease for the equipment, there are generally three options: end the terms of the lease and return the equipment, extend the terms and keep making payments to use the equipment, or most equipment leasing products include the option to buy the equipment outright from the lender.
Benefits of Equipment Financing
Purchase, Lease, or Repair Business Equipment
The main benefit of small business equipment financing is that you’ll have the resources you need to purchase, lease, or repair your equipment on your business. You don’t have to wait for months to repair faulty equipment or make the necessary upgrade. With the right equipment, you can improve your bottom line and cater to more customers.
No Need to Submit Additional Collateral
One difference between equipment loans and traditional loans is that the equipment itself is used as the collateral to secure the loan amount. It is one benefit that small business equipment financing provides proprietors, as the emphasis for the lender is more on the value of the equipment over time than the borrower’s credit history. This makes qualification more accessible for small businesses and gives small business owners the opportunity to obtain the expensive equipment needed to get the job done when they might have not been able to afford the purchases outright.
Spread Equipment Payments
Maintaining positive cash flow is a constant concern for small business owners. Purchasing equipment upfront can only complicate your cash flow. Taking out an equipment loan or lease allows you to spread the cost of the equipment, so you’ll be able to allocate a fixed amount every month and budget your expenses.
Enjoy Tax Benefits
There is also a tax benefit for small business owners that utilize equipment financing. With an equipment loan, because you make payments throughout the terms of the loan you pay interest to the lender at the equipment financing rates agreed on in the loan terms. For most equipment loan terms, the equipment finance interest rates paid on the payments can be written off as tax-deductible. However, the total principal payment cannot be written off.
For most equipment leasing program terms, small business owners can write off the entire lease payment as a business expense. That means the entire amount paid for the equipment can be written off by deducting the monthly lease payments. Another big tax benefit that applies to equipment leasing is the government incentives written into the tax code. According to Section 179 of the IRS Tax Code, the full amount of equipment purchases can be written off if an equipment lease is set up. Even if you do not pay the entire amount for the equipment financing rates in the year you are filing taxes for, you can deduct the entire amount on your taxes for that year.
We recommend forming a strong relationship with your tax professional and doing research when choosing the right lender for your financing needs. By working closely with lenders and tax professionals, you can take advantage of the tax benefits that equipment financing companies can offer.
Equipment financing increases efficiency and productivity, takes advantage of tax benefits, and preserves cash. Talk to our financial professional about how equipment financing can work for your small business.
How Long is the Underwriting Process for Equipment Financing?
The application process to apply for Equipment Business Loans is faster when the equipment costs are under $200,000. When the equipment finance loan is under $200,000, the complete application and closing process can be completed within 24 hours.
“Small-ticket” commercial equipment loan decisions are heavily driven by the equipment type and the credit quality of the business owners. With strong personal credit, an established business history, and financing a high residual equipment, you can expect the application process to take just 24-48 hours.
If the loan for equipment purchase is over $200,000, there might be more financial information that could be required before closing on the deal. The process of this equipment finance loan can take anywhere from 7 to 14 days due to the more thorough underwriting process to obtain the best equipment loan rates amount approval.
Again, all of the specific details will vary from lender to lender, so if your business is considering small business equipment loans, make sure to browse the potential options available for you.
What are the best industries for Equipment Business Loans?
Transportation
Financing transportation equipment can generally be expensive. Paying out of pocket is not feasible for many transportation business owners, which means finding the right financing plan is essential. With truck financing, transportation companies are able to purchase new equipment that requires less upkeep and is more reliable. Anytime a truck goes down for repairs or maintenance, business owners are missing out on revenue-generating opportunities.
Transportation equipment financing also allows you to preserve capital and expand cash flow. By saving money on the types of large purchases required for transportation, your small business can use working capital on other business expenses. The application and qualification requirements for transportation equipment are often quick and easy to get through because the equipment itself acts as collateral on the financing.
Medical Practices
Construction
Construction companies also need quality equipment and machinery to take on and complete new jobs for their clients. Each project is unique and requires specific equipment, and this often means that construction business owners need to make quick decisions to purchase the right equipment for each job. Some construction companies don’t always have the working capital on hand to purchase the equipment with cash and instead turn to finance the equipment over multiple years.
By using equipment financing, construction companies can extend the cost of equipment finance interest rates into longer payment terms and avoid costly up-front expenses. It allows the construction company to preserve working capital and obtain the tools necessary to get the job done.
Farming
By using equipment financing, many farmers have worked with lenders to save working capital and make payments for their farming equipment while using the equipment to maintain operations and keep the income coming in. If you are a farmer with equipment needs, consider exploring options from different lenders to find an equipment financing plan that works for your farming business.
Restaurants and Hotels
The Hospitality industry requires constant upgrades and repairs. In the restaurant industry, especially, you need to purchase commercial ovens, refrigerators, stoves, and other equipment in order to keep up with the competition and stay on top of current trends. These are expensive purchases and can be difficult for a small business owner to sustain cash flow without proper financing plans; hence, they need commercial equipment loan.
Additionally, there is a considerable amount of equipment and machinery needed for a hotel to operate efficiently. Hotels are responsible for everything from furniture, washers and dryers, and transportation vehicles. Hotels have to constantly update their equipment in order to keep up with the current trends, as well as their competition to keep guests booking rooms with them. The overhead expenses can be overwhelming and can dramatically impact a hotel’s cash flow if there is not a proper financing plan in place. By using equipment financing, hotel owners can reduce the burden of large purchases and extend the payment out through the length of the financing terms.
FAQ About Equipment Financing
How do you qualify for equipment financing?
The determining factors in qualifying for equipment financing are based on the business credit history and time in business. Additionally, you can be prequalified for equipment financing for new business by providing bank statements and a credit report before purchasing any equipment or machinery. Small business owners often utilize equipment financing because the equipment is used as collateral, which helps secure the loan for equipment purchase, especially for new business owners that might not qualify for an unsecured loan.
How long does the application process take for equipment financing for new business?
The equipment financing application process time frame varies depending on the type of equipment being purchased. You will need to provide an invoice of the equipment, bank statements, and complete an assortment of documents.