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Posted 02/09/2022 in Business Loans

Equipment Financing: How Does It Work?

Equipment Financing: How Does It Work?

As we envision a world finally free from the effects of the global pandemic, the economic landscape is looking ripe for the taking. Businesses are now implementing different marketing campaigns, hiring competent staff, and purchasing the best equipment to produce their products and services.

To achieve this, your business needs to have sufficient cash flow. But not every business coming out of the pandemic has the necessary funding to make this possible. It’s recommended at this point to request a loan from banking institutions and certified lenders in your town or city. 

One of such loans is equipment financing. This article will explore what equipment financing is and how you can go about getting one for your business. 

What Is Equipment Financing?

Equipment financing is a loan that is granted by banks and lenders to businesses in the purchase of equipment or any other vital asset that will be used in running the business. This type of loan is perfect for small businesses, but large corporations can also apply for the loan. 

Businesses understand the vital role of having the right equipment in place. To successfully carry out your daily operations, you’d need to purchase, hire, replace, or upgrade your equipment. It goes a long way in keeping your business afloat.

How Does Equipment Financing Work?

Say you need to purchase new office PCs, furniture, vending machines, oven, etc., and you don’t have available resources to do so, you’d need equipment finance from banks and lenders. So, you approach these financial institutions and tell them of your intention. If your request gets approved, they will send the finances over to cater to that business needs. 

After which, you’d be making periodic repayments plus interest as agreed with the lender over some time. The lender may seek security by placing collateral on existing business equipment, business assets, or a personal guarantee. It is essential to review every requirement from lenders before signing up on them.

Options for Equipment Financing

There are two primary options for choosing equipment financing. Choosing what works best for you depends on knowing which is suitable for you. These options include: 

1. Equipment Purchase

In this case, your business obtains a loan to purchase equipment, which acts as collateral. If your business fails to pay off the loan, the lender may take the purchased equipment and sell it off to recover their loan. 

Depending on the nature of the said collateral, the lender may be willing to offer up to 100% of its value for its purchase. Typically, lenders may grant you up to 80% of its value, and you’d have to complete its acquisition by using out-of-pocket funds. 

The interest rates for this type of financing can range anywhere between 4 to 30%. The lenders will review your credit rating, how long the business has been in operation, the value of the equipment, and the loan repayment length.

The advantages of this type of equipment are that you have an asset in place when you pay back the loan with interest. Thus, if you need a new loan for your business needs, that asset can act as collateral. 

2. Equipment Leasing

Leasing is also another option you should consider for equipment financing. Equipment leasing asks the bank or lender to grant you a loan to hire equipment for your business needs. 

It is short-term financing that is less expensive compared to equipment purchase. If your business needs equipment for in-season sales that will become obsolete during the off-season, then equipment leasing is just perfect for you. It gives you the opportunity of hiring updated equipment and returning them when they’re no longer needed. 

Some equipment leasing contracts may include a purchase option at the end of the lease. So, you’d need to consider if you’re going to be needing the equipment at the of the loan period. If you aren’t, then it doesn’t apply to you. 

The main difference between these two types of equipment financing is that:  

  • You get to own the equipment after the repayment period for the equipment purchasing.
  • During equipment leasing, you don’t have to worry about the equipment losing value or being outdated. 

Pros of Equipment Financing

Every loan has its merits and demerit, and equipment financing isn’t different. The pros of this type of loan include: 

  • Build your business credit. If your business credit score is low, equipment financing is one of the best ways to boost it. As long as you stick to the monthly repayment schedule, your credit history will be better for it. 
  • Affordable. Equipment financing is quite affordable, especially if you opt for a secured loan. 
  • Provides the equipment you need. Whether you’re looking to purchase or hire equipment, this type of loan is suited to your needs. 

Cons of Equipment Financing

  • Relatively expensive. Equipment financing is relatively pricey compared to saving up the funds to buy or hire the equipment. However, if you need the equipment urgently and don’t have the available funds, it’s a viable option. All you need to do is review the interest rates provided by lenders and select the one that works best for you. 
  • Cashflow hindrance. It may affect your steady cash flow while trying to pay back the loan. However, if your business is running smoothly, you won’t need to worry about this. 
  • Late payment can impact your credit. Missed or late payments can affect your credit scores negatively. So, it’s recommended that you remain financially responsible to pay back the loans promptly. 

Documents Needed to Apply for Equipment Financing

The following documents may be needed by a lender when you apply for equipment financing:

  • Bank statements
  • Business tax returns
  • Reasons for purchase or lease
  • Business license
  • Equipment specifications
  • Business credit score 
  • Personal credit score (if the business is a new one)

Final Thoughts

Applying for equipment financing is recommended if you don’t have available resources to acquire or lease equipment for your business. 

Bunny Lender is designed to connect you with hundreds of certified lenders in your city. You can review their conditions and sign up for one of them if satisfied with their requirements.

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