How Does Equipment Financing Work?

How Does Equipment Financing Work?

Whether you’re a new small business owner or a seasoned business veteran, you already know how important it is to quickly obtain the necessary equipment so you can get started performing crucial tasks to keep your business running.

You also probably already know that it’s expensive to buy new equipment outright, and it can take weeks to have new equipment delivered, so this isn’t a cost-efficient or time-saving option. Equipment financing is another option.

Of course, equipment financing sounds like a great option for most business owners. But how does equipment financing work? We’ll tell you everything you need to know about equipment financing in this article.

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How Does Equipment Financing Work?

Of course, the first thing you need to know is how equipment financing works. When someone says “equipment financing”, they’re talking about a loan that business owners take out to pay for their equipment. How does equipment financing work? You make payments on the loan periodically and pay off the interest.

The lender my stipulate that there should be a lien put on the equipment as collateral for the loan. This is pretty similar to a lender putting a lien on a car while the borrower pays the car loan off. The lender can also choose to put a lien on your other business assets, meaning that liens aren’t limited to the equipment.

And if you default on the loan, the lender has the right to take either the equipment and the business assets they put liens on, as well as your personal assets. It’s a good idea to read through the terms of the loan so that you know what you’re getting into and what could potentially happen if you can’t fulfill your obligations.

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Equipment Leasing

If you’re asking “How does equipment financing work?”, then it’s good to know the difference between equipment financing and equipment leasing so you’ll be able to choose between the two.

Equipment leasing is different from equipment financing because you typically won’t own the equipment at the end of the agreement. Instead, it’s a rental agreement. Part of the agreement is that you get to rent the equipment for a designated period of time, as determined in your lease agreement.

After the lease runs out, the equipment goes back to its owner, unless you set up a lease renewal or make a buyout arrangement.

Leasing qualifications aren’t typically as strict as financing qualifications. But financing may be a better option if the equipment is a vital necessity for your business and indefinite rental payments would cost you more money in the long run.

Financing Rates and Terms

If you’re asking yourself “How does equipment financing work?”, then you should find out a bit about financing rates and terms so you aren’t blindsided by them.

It’s important to know that financing rates and terms are dependent on your specific situation and the qualifications that you meet.

Here’s a look at some of the financing rates and terms you will likely see so that you’ll know what to expect:

  • Fixed interest rates: 2.00%- 20.00%
  • Repayment terms: 1- 25 years
  • Funding speed: 2 days or less in some instances
  • Other requirements: You may be required to have a minimum credit score or meet certain business operating history requirements
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How to Qualify for an Equipment Loan

If you’re wondering “How does equipment financing work?”, then you need to know how to qualify for an equipment loan.

There are many different qualification requirements that lenders use. We’ll discuss a few of the more common qualifying factors, but it’s important to know that different lenders have different standards, so you should check that out before you sign an agreement.

Of course, credit scores are a major factor when it comes to obtaining any sort of loan. Lenders will look at both your personal credit score and your business credit score. You should look up your credit scores online before you attempt to get a loan so that you know what you’re working with. Luckily, it’s easy to look up your credit score online. The better your credit scores, the better terms you’ll get.

While you’re doing research to answer the question “How does equipment financing work?”, it’s important to know that your credit scores aren’t the only qualifying requirement you’ll need to meet. Many lenders require a business plan to describe in detail your plans for future business growth.

This allows lenders to read extensively about your business, how long you’ve been operating, how much money your business makes, and more. Some lenders have annual income requirements for equipment financing, so this is important.

Many lenders require a cash flow statement or balance sheet. This lets them see how much money is coming into your business, and how much is going out. These factors give lenders a good picture of your company’s overall financial situation.

You may also be required to provide the lender with your personal information, as well. Some of the things you may be required to provide include tax returns, a list of your personal debts, and personal bank statements.

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Where Can You Go to Get an Equipment Loan?

If you’re asking “How does equipment financing work?”, then one of the most important pieces of information you need is where to get an equipment financing loan.

Luckily, you have several options. Many places offer equipment loans, ranging from large corporate financial institutions to online lenders that specialize in working with small businesses. There are pros and cons with both.

If you choose a traditional financial institution, they typically have stricter qualifying requirements. However, they typically offer better rates and terms than other lenders. Traditional financial institutions are usually a better bet for companies that have a number of business assets and good cash flow.

If you choose an online lender, they are usually more flexible with their qualifying requirements. The drawback is that their rates and terms aren’t typically as good as the terms that traditional financial institutions usually offer. Online lenders are a great option for startups, as well as any business that doesn’t meet the qualifying requirements of traditional financial institutions.

If you’re asking yourself “How does equipment financing work?” and trying to choose a lender, there’s a fairly easy way to decide. It depends on how far into your business journey you are and whether you’d rather have faster, flexible service or better rates.

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Benefits of Equipment Financing

On your quest to find answers to the question, “How does equipment financing work?”, you should learn about how equipment financing can benefit you. Here are some of the benefits of equipment financing.

You can build up your business credit with equipment financing. This is important in the long run because with an improved credit score, your business will qualify for more loans and financial options in the future.

If you’re asking “How does equipment financing work?”, then you should know that equipment financing can be a more affordable option to obtain your equipment. Buying your equipment outright or agreeing to equipment leasing can be expensive, and many people either can’t afford it or don’t want to deal with indefinite payments.

You’ll get the equipment you need to run your business. Without equipment financing you could be stuck spinning your wheels and stressing about how to get the necessary equipment for your business.

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The Drawbacks of Equipment Financing

It’s important for anyone who’s asking “How does equipment financing work?” to understand the big picture in terms of equipment financing. It’s not all sunshine and rainbows, so we’ll tell you about some of the drawbacks, as well.

Depending on the terms of your loan, equipment financing could be more expensive than just outright purchasing the equipment yourself. Much like equipment leasing, it could cost you more money in the long term.

Payments from your equipment financing loan will restrict your cash flow, at least until it’s paid off. Obviously, any time you’re making payments on something, then you’ll have to add that payment to the list of outgoing payments.

It’s important for you to know if you’re asking “How does equipment financing work?” that if you find that you can’t make the payments on your equipment financing loan for some reason, it can seriously wreck your credit score. Even worse, it could put you out of business in some extreme cases.

This isn’t ideal because, of course business varies from day to day and month to month, so one month you could be perfectly capable of making payments on your loan, and then a few months later fall behind on it.

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How Does Equipment Financing Work Conclusion

After reading this article you should have the answers to the most burning questions you have regarding equipment financing, like “How does equipment financing work?”. If you own a small business and want a fast way to get your equipment, then equipment financing is probably a good solution for you.

There are a few drawbacks to equipment financing, and you definitely shouldn’t consider this sort of loan if you can’t be certain that you can make payments on it, because missing payments could jeopardize your entire business (much like any other loan). But, for many business owners, equipment financing is a cost-effective and fast way to get the tools they need to build thriving businesses.

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FAQs about How Equipment Financing Works

Does the equipment I need determine whether I should finance or lease?

To a degree, yes. If you need equipment that wears out fast or will be obsolete quickly, that’s probably best suited for equipment leasing. This includes computers, software, certain types of medical equipment, and any equipment that experiences a lot of wear and tear.

Where can I get equipment financing?

There are several places you can find equipment financing, such as banks and traditional financial institutions, credit unions, equipment financers and online lenders.

Do I have to make a down payment?

This depends on both your lender and your qualifications. If you are required to make a down payment, you can expect it to be between 10%- 30%.

Are there alternatives to equipment financing?

Yes. As we’ve already mentioned, you have the option to go with equipment lending, instead. But another alternative is a business line of credit. This provides your business with access to money when you need it, like when you need new or upgraded equipment.

Are there different types of equipment financing loans?

There are 4 different commonly used equipment financing loan types: hire purchase, operating lease, finance leas, and specialist purpose loans. You should get familiar with all four types before you choose to obtain an equipment financing loan.

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March 31, 2022
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