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EXCEL CAPITAL - EQUIPMENT FINANCING (1)

What is equipment financing?

When your business depends on costly equipment for day-to-day operations, a broken machine can mean much more than the cost of replacing that piece of equipment.

It can mean that day (or week’s) sales, making an important customer’s order by the due date, or even payroll. Or something worse.

That’s where equipment financing comes in.

With it, you’re able to avoid the adverse consequences of costly equipment repair. And you’re able to do that by advancing the money you need to purchase that piece of equipment fast (usually in as soon as 3 days).

In exchange, you pay back the cost of that equipment with interest, with the loan term typically being on a 1-5 year repayment plan.

Highlights:

How does equipment financing work?

Every lender needs some form of security to make sure they’re going to be repaid for the money they’re lending. This is most commonly known as collateral.

With traditional bank loans, the loan is “secured” through some form of hard collateral such as property, cash, or a vehicle.

This means that if you can’t pay back the loan amount, the lender will collect the collateral to settle the debt.

In this way, equipment financing is unique.

With it, the new piece of equipment itself that you purchase with the loan serves as the collateral for the loan with a simple UCC filing on the business collateralizing the equipment being leased or financed.

So, you’re not required to put up any kind of additional collateral to be approved for equipment financing.

Similarly, the amount of money you’re approved to borrow is exactly based on the value of that new piece of equipment.

Equipment financing vs. Equipment leasing: What’s the difference?

Similar to equipment financing, equipment leasing is another option to consider which works similarly.

The difference really comes down to whether you need a short-term or long-term (or permanent) solution.

You own the equipment through equipment financing and are working to pay off the loan itself. But with equipment leasing, you only have the equipment for as long as you’re paying for it.

And, if it’s a critical piece of equipment you need to use every day for your operations, you may very well continue to pay monthly well passed the value of the equipment, meaning you’re paying more than you should have.

Pros and cons of equipment financing

With equipment financing’s unique niche among small business financing options, it comes with its own set of unique pros and cons.

There are several benefits to equipment financing. However, there are also some cons you should be aware of, so it might not be the ideal financing option for you.

Here are the pros and cons of equipment financing:

Pros

Cons

How to qualify for equipment financing

If you’ve gotten to this point, you’re probably considering equipment financing as a good (or ideal) solution to your funding needs.

So, what does it take to qualify for equipment financing?

Equipment financing qualification factors include:

What documents are needed for approval?

In addition to the above qualification factors, you’ll need a few important documents for approval.

These are used by the lender to obtain an accurate assessment of the health of your business as a whole.

The documents you’ll need include:

Alternative lenders, who offer equipment financing, generally want to obtain a complete view of the financial health of your company.

As opposed to traditional bank loans, with equipment financing, it’s about more than just your credit score. Though credit does carry weight as well, so keep that in mind.

And once you’ve applied for financing and been approved, your interest rate will depend upon:

Vehicle (truck and semi-trailer) financing vs. equipment financing: Know the differences

It’s important to point out that financing a vehicle for business, such as a truck or semi-trailer, is somewhat different from financing any other piece of work equipment.

Most traditional equipment financers won’t finance anything with wheels, which includes skid steers and tractor trailers. And, if they do, they typically require a down payment of at least 20% and have a higher reliance on credit to.

The reason for this is three-fold:

These points combined mean it can be more difficult for a lender to recover in the case of default, so they need to maintain stricter qualification factors to make up for it.

Keep that in mind if you’re considering financing a new vehicle for business purposes.

How much does equipment financing cost?

How much equipment financing will cost you all depends on the lender, as they will have somewhat varying terms.

However, the general idea is the same:

It’s important to understand that with equipment financing, you will be paying more than the value of the equipment over the life of the loan.

That’s the trade-off for obtaining the cash you need to purchase the equipment now instead of losing out on the revenue that the equipment helps you obtain.

EXCEL CAPITAL - EQUIPMENT FINANCING (1)

Equipment financing: An example

For clarity sake, let’s go over an example so you understand exactly how equipment financing might work for you.

Jen owns a small retail clothing company called Jen’s Threads that makes its own items in-house.

One of Jen’s specialty sewing machines worth several thousand dollars has broken. She needs to repair it quickly or risk a major slowdown on her production line that will cost both time and money.

And, let’s say that machine costs $5,000.

If her repayment term is 2 years, APR is 10%, and payment monthly, she’ll pay $230.72 each month until the loan is fully paid off.

Over the course of that time, her total interest cost will be $537.39. That brings her grand total– the total amount of money she pays for that piece of equipment– to $5,537.39.

That $537.39 represents the extra amount she had to pay in exchange for the convenience of being able to obtain the money for that critical piece of equipment upfront.

Ultimately, you’ll have to judge if obtaining that equipment quickly is worth the interest cost for you in your own situation.

However, in many cases, waiting to save the money for that piece of equipment– especially if it’s of high importance– will cost you that much or much more.

So, it’s important to consider what you’re gaining and losing by taking both routes and make the choice you believe is best for your business long-term.

A flexible financing solution for small business owners

Equipment financing offers an entirely unique funding solution. One that’s ideal for when a critical piece of equipment breaks that can hold your business back from generating revenue.

With many pros and few cons, if an important piece of equipment has recently broken or become old and less reliable, financing new equipment may just be the perfect option to get you back up to speed fast.

Click here to see if you’re approved for equipment financing.