The ultimate guide to equipment financing.
Sencha Credit

The need to always improve sales and performance in a business is an important one, and many times, it requires upgrading some tools or getting new ones. Many small businesses fear using money directly made from the business to buy equipment for fear of affecting their cash flow. This is what equipment financing is for.

What is Equipment Financing

Equipment financing is essentially a loan or lease that you get for the sole purpose of buying, upgrading or changing your work tools.

Whether it is getting a new truck, a photocopying machine, or upgrading your laptop, improving your business equipment is usually an expensive process that can affect the day-to-day finances of the business. 

Getting an equipment loan helps make the process easier by lending you the huge amount for the tool you need or giving you the tool in credit. Either way, the beauty of this solution is that you don’t have to pay the big money once and for all. An equipment loan helps you break the payment into smaller amounts that you can conveniently pay every month until the full money is paid.

How does Equipment Financing works?

With an Equipment financing loan, the equipment you purchase is also considered the collateral. This means that if you are unable to meet up with the monthly payments to repay the loan, the lender can collect equipment. 

When some lenders provide you with the tool needed instead of money, they ask for a down payment that is usually about 10-25% of the equipment's cost. The rest of the money is what will be broken into the smaller amounts you are to pay every month. The more money you pay as a down payment, the lower the interest rate. 

For example, say your printing business needs a new photocopying machine that is about $4,000. There are two ways you can get it through debt financing;

A lender gives you the entire $4,000 with a 10% interest and gives you a payment period of 10 months. The 10% of $4,000 is $400, so the total amount you have to pay back is $4,400. This means that for the next ten months, you would pay back $440 till the $4,400 is complete.

A shop that sells photocopying machines tells you to make a down payment of 20% to get the machine. This means that you pay $800, take the machine and the remaining $3,200 plus interest over a period of 10 months.

Forms of Equipment Financing

Equipment financing agencies can finance your equipment purchase in different ways, which include

Loan: One way to get equipment finance support is through intermediate-term loans, which makes buying equipment easy for new or small scale businesses .

However, It's important to be cautious with loans because the equipment is often depreciating. This means that by the time you are done paying up the loan, the market price might have reduced, causing the equipment to lose its worth. 

These loans can be an excellent option for business financing and improve your credit rating.

Leasing and purchase hire scheme: If you run a small business, leasing is a great way to get Equipment financing. With leasing, you can use the equipment for an agreed period by paying rent and instalments that cover the equipment's value and interest.

The best part is that many financiers also offer assistance with equipment maintenance costs. This means you won't need to spend much of your money on keeping the equipment in good shape. 

It gives you the flexibility to access the tools you need without making a huge upfront payment, making it a smart choice for small businesses.

Invoices Financing: Another cost-effective way to obtain Equipment financing is through invoice financing. This method unlocks the cash tied up in your unpaid invoices.

When you use invoice financing, you're essentially borrowing money based on what or how much your clients owe you but haven't paid yet. It's a smart way to ensure you'll have cash available whenever you need it, as you'll repay the loan when your clients settle their invoices. 

This method provides a reliable source of funds and helps you maintain a steady cash flow, making it an effective option for managing your equipment financing needs.

Merits of Equipment Loan

There are numerous advantages to taking an equipment loan for your business. They include

Easy qualification: Among other types of loans, an equipment loan is the easiest to qualify for. It has a lower score requirement and requires less financial history, which is suitable for small businesses. 

Cash flow: Equipment loans serve as a way to improve business cash flow management. With equipment financing loans, the company can keep money for day-to-today spending, while still obtaining the necessary tools for productivity. 

Low-interest rate: Equipment loans have relatively fixed small interest rates compared to other loans. Interest rate is mainly affected by creditworthiness and Financial offer, which is negotiable.

No additional Collateral: unlike other Loans, equipment loans make the equipment financed the collateral for the loan. This means that you would not be needing external collateral.

Quick funding: unlike other loans, getting an equipment loan is faster and straightforward as only a few documents are needed to approve the loan.

Ownership: After paying up the equipment loan, you have sole ownership of the equipment. Failure to pay back the loan can rip you off your ownership. 

Tax deductible: Unlike other loans, the interest on the equipment loan is tax deductible when paying back the loan. 

Demerits of Equipment loan

Equipment loan how good still has a few disadvantages, which include: 

Limited financing: unlike other loans that give you the free will of how to spend your loan, an equipment loan is limited to equipment alone and can not be used for any other purpose apart from that. 

Down payment: equipment payment mainly needs a down payment. Most down payments can be huge, and most small businesses may need help to afford a down payment for expensive equipment. 

In the case of technology, financed equipment may need to be updated before you finish paying for the equipment loans and selling or discarding outdated equipment may be difficult.

Equipment loans Vs Equipment Leasing

Many businesses have difficulty contemplating whether to get an equipment loan or leasing. Equipment leasing is the best alternative to equipment loans. The leasing company owns the equipment, and you pay to use it. 

Equipment lease has a fixed rate and lasts for a fixed period, meaning your payment will still be the same. The lender usually evaluates your business and personal credit score to determine your rate. 

Equipment leases are often provided by companies that offer equipment financing or the equipment's manufacturer. Leasing is a good option when the equipment's value may decrease quickly due to wear, tear, or rapid technology changes. 

One disadvantage of equipment leasing is that you can't make any changes to the tools. Only the financier can make adjustments according to will requirements. 

An equipment loan provides businesses with the flexibility and access to operating tools while conserving money in the business  and maintaining a strong credit line for other expenses or future loans.

However, it is advisable to check thoroughly the terms and conditions of the Equipment Loan before accepting the loan.