Equipment finance describes a loan or lease that is used to obtain business equipment. Business equipment may be any tangible asset other than real estate – examples include office furniture, computer equipment, machines used in manufacturing, medical equipment, and company vehicles.
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Equipment finance is an important part of business operations for a couple of reasons. First, for a start up or early-stage company, equipment financing may be an essential step in getting the business going.
Second, because equipment financing is typically used to obtain costly equipment, the debt obligation incurred represents a significant financial commitment. Therefore, business owners or company executives must carefully consider any equipment finance plan and try to secure the best possible financing terms.
There are two primary options for equipment financing: obtaining a loan to purchase equipment or leasing equipment. Whatever option may be best for your business depends on several factors, such as your business’ credit rating (which impacts the interest rate at which it can borrow money) and the useful life expectancy of the equipment being financed.
When you obtain business equipment using a loan to purchase it, the equipment serves as collateral for the loan. Thus, the lender holds a lien on the equipment and can take possession of it should the borrower default on making the loan payments.
Because there is substantial collateral for the loan, a bank or other lender may be willing to lend up to 100% of the equipment’s value; however, loans up to 80% of the equipment’s value are more common. Therefore, even with an equipment finance loan, the borrower may need to provide a sizable down payment.
A business owner should carefully examine their ability to make loan payments. If they doubt their ability to keep up with the payments, leasing equipment may be a better option.
Loan terms for business equipment range anywhere from several months to 10 years or longer. Interest rates for equipment financing vary widely – they can range from 9%-24% upwards. The determining factors are primarily the credit rating of the business or business owner, how long the business has been in operation, the length of the loan term, and how well the purchased equipment is projected to hold its value.
One key benefit of purchasing equipment, as opposed to leasing it, is that when the equipment loan is paid off, the business owns a valuable asset. If the business needs to borrow cash for another purpose, such as expanding business operations, the previously purchased equipment can be used as loan collateral to obtain more favorable loan terms.
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