Equipment financing can help you buy equipment and machinery for your business expansion. Read further to know more about equipment financing in detail.
As a business owner, you understand the importance of having the right equipment to run your business smoothly. In most cases, this equipment will need to be replaced and updated frequently.
If you are a small business or a business that requires a large sum of working capital, frequently investing in the equipment and machinery may disrupt your budget and financial plan.
In such a case, equipment financing can serve as a beneficial option. You can obtain these financing options from your bank or equipment financing companies in your area. Let us learn more about equipment financing in detail.
What is equipment financing?
Equipment financing refers to the financial instrument, lease, or loan provided to business owners for purchasing new machinery and equipment. It is especially beneficial for small business owners to scale up their business without disrupting their cash in hand.
Instead of making a lump sum payment for the cost of machinery, they can make manageable periodic payments. These payments consist of the principal amount as well as the interest.
The loan or lease is specifically allotted to secure tangible equipment or machinery but does not cover real estate. The financial instrument usually covers financing of business-related equipment only. However, depending on the terms and policies, some equipment financing companies may also assist with equipment for personal usage.
Equipment financing is offered in one of the two ways.
1. Equipment financing loan
2. Equipment financing lease
Distinguish between equipment financing loan and lease in detail.
1. Equipment financing loan
In the case of an equipment financing loan, you can purchase any equipment or machinery by obtaining a loan from the equipment financing company. The loan value will cover 80% or more of the equipment value. So, you can acquire the equipment by making a small down payment of 20% of the cost of the asset. In some cases, the loan amount covers the entire cost, and you don’t need to make any down payment.
As collateral against the financial loan, the financing company may require a lien on the equipment being purchased. When you repay the loan, you get complete ownership of the property free of any lien. However, failure to pay the loan may lead to repossession of the equipment.
2. Equipment financing lease
An equipment finance lease is a lucrative choice, especially if you want the equipment and machinery for a short duration. This option is more suitable for industries that consistently require an upgrade to the machinery as the old technology becomes obsolete.
You can obtain the property without making any investment or down payment. However, you need to pay fixed rental payments. Leasing equipment is a much cheaper alternative to taking a loan as it does not require you to pay high interest.
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