What is Equipment Finance?
It is common knowledge that industrial equipment and machines are expensive enough. The entrepreneurs and startup businesses seldom have this much budget to finance their business for such equipment purchases. In several cases, running businesses can’t arrange immediate funds for maintenance or replacement of the business equipment like x-ray machines, trucks, or generators. Here comes the need for equipment financing, and it applies to any apparatus or device, such as laptops, diagnostic tools, tractor, etc. The terms and conditions and rates will depend on the price of the equipment– used versus new.
Influence of Equipment Finance
Business equipment financing is a common practice used by several businesses. Besides the shortage of funds, this model is also used to stay on the safer side of the dealing. Since the banks proceed with the transaction and agreements, this practice improves the utilization of cash in hand for working capital flow. In general, the process of equipment financing involves the lender to provide finance for the business against a piece of equipment for security. This criterion works for those businesses who find business loans challenging to get, a part of the machine is mortgaged up to the lender and used as security. If a company is unable to repay the installments and becomes a defaulter, the lender ceases the material.
A dilemma is when the old equipment doesn’t allow you to expand the business and affect an appropriate production. It would hold you back from increasing the units of the output. Therefore, you need new equipment to avoid lacking in business production. Ultimately, it will increase efficiency and bring more customers.
Traditional Equipment Finance
Equipment finance is mainly used to buy equipment for the business. The banks lend 80% to 100% of the capital required to purchase the equipment. Usually, the installment term is three to seven years. When you pay all the installments within the conditions decided by mutual agreement of the business and the lender, the equipment becomes the sole property of the company.
It is also essential to keep in mind that the installment terms of an equipment loan and interest rate may vary. These interest rates, terms, and conditions depend on many crucial factors. A few of these factors include credit score history, the time length of the installment term, required capital, and annual revenue.
Pros and Cons of Equipment Financing
Advantages of equipment finance
Equipment financing enables businesses to invest their running cash flow to the production and supply area. Instead of spending a particular amount in equipment purchasing, the operating cash flow should keep on running the same way as it was running before the need for new equipment. This technique would not affect the production and other related areas of the businesses. I would rather say the long-term payment criterion is comparatively better than the short-term. However, both the conditions can be considered as favorable but depend on the situation.
Long and Short-Term Lending
For instance, let’s assume the long-term payment installment schedule of seven years, a businessman has to pay little amount compared to the short-term payment schedule. It is easy to pay a small amount each month, along with interest for seven years. On the other hand, if a business person is conscious about the total interest amount to be paid for seven years is more than that of three years, the short-term is the better option for such a case. A benefit of a short payment schedule is that a businessman has to pay significantly less interest rate.
Documentation and flexibility
The documentation of equipment finance is not lengthy and requires only limited paperwork. Moreover, an essential point is the quick approval of the investment, and a business person may have immediate access to the cash to purchase the equipment. Equipment finance also helps to maintain working capital and invest that capital for other areas to grow the business. The requirement for equipment finance is comparatively more flexible compared to the other loans. It is crucial to maintain a FICO credit score of 550, at least. A simple way to create a positive impact on your credit score is to pay the installments on time. The equipment also serves as substantial collateral for a long time.
Cons of Equipment Finance
Besides the advantages, there are some disadvantages that we are going to discuss here. The main problem is that you don’t own the equipment. You may consider this equipment as a type of rental equipment. As far as the cost is concerned, it can cost you more in the long-term payment schedule.
FICO Credit Score
In case you have a low credit FICO score, the lender or the bank may ask for a blanket lien. It gives the right to seize the business assets if a business person is unable to pay the installment on time. If your business fails to pay, you have to make the payments on behalf of your business. A businessman sometimes realizes that the amount to the lender has exceeded the cost of equipment, which he paid in terms of interest. A businessman often feels regret for the decisions made in the past. The main disadvantage of borrowing finance from a lender involves high risk. In case of any incident, you are unable to pay the installments on time, you will be a defaulter, and ultimately your credit score will be decreased.
Equipment Finance through Banks
The banks consider total exposure of the business before lending the equipment finance, especially for small businesses. They further bound the small companies to make all business transactions through them. It will limit the further borrowing ability of the borrower.
Besides the depreciation of the equipment, the other risk is when the material is obsolete, and you have to pay the remaining installments, although the material is not generating the profit for your company. There is also a condition in borrowing equipment finance; the length of time can’t exceed the length of the useful economic life of the purchased equipment.
Sohail Rupani is a Senior SEO Strategist and Blogger for PNC Digital, Link Building HQ. He is passionate about technology and loves to analyze the tech industry in his spare time and stay in touch with the latest happenings. He also writes technical articles about SEO and digital marketing. Follow @sohailrupani for more updates.