There is no doubt that all businesses need some kind of equipment in order to perform their daily operating. Isn’t, it right? Let’s take an example – restaurants require commercial cooking appliances, whereas construction companies require excavators and bulldozers.
More importantly, some businesses are able to buy their equipment, others can’t. That’s when the equipment financing role comes in. It provides an effective and reliable funding solution for equipment, especially the high priced one. If you are thinking about this solution for your business, then you need to first understand this funding method.
So, what is equipment financing?
Equipment financing entails loan usage in order to secure your business equipment. This funding solution is offered by conventional lenders or equipment financing companies; it enables you to start using the equipment immediately.
Just like a mortgage or car loan, you need to do regular payments on your financed equipment. The equipment financing company or lender may need you to do a down payment, while also doing the regular payments until the equipment is eventually paid off.
How does equipment financing work?
As you now know that equipment financing means loan used in order to buy business-related equipment, for instance, a restaurant oven. Equipment loans offer for periodic payments that compromise of interest as well as principal over a preset term. As for loan security, the lender may need a lien on the purchased equipment as guarantee/collateral against the debt.
Once you are able to pay the loan in full, you can then own the equipment as lien-free. The equipment loan structure may inflict a lien upon extra business assets or need a personal guarantee. If you can’t pay your loan, then it can result in your business assets or personal assets repossession. Thus, a careful review of terms of the loan is important to understand your risk involved in this funding solution.
It is also important to note that equipment financing is different from equipment leasing. In case of equipment leasing solution, you pay the equipment owner periodic rent for equipment usage over a predetermined period. At the end of the term for leading, the equipment is finally returned back to the owner. In general, leading qualifications are quite less stringent as compared to financing. However, whether lease or loan is better, it all depends on your particular situation.
In order to help you decide – ask these two questions to yourself – how much budget you have currently and how fast the equipment you are eyeing will become out-of-date.
If you have the budget for a down payment, and the equipment you want to finance will surely last for a long time for your business, then equipment financing might be the right solution for you.