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Equipment Financing

As a business owner, going through the process of buying the necessary equipment can be financially exhausting, particularly when you are just starting a business. However, this process is unavoidable because you need these items to ensure the smooth running of your business operations.

For most businesses, having access to a diverse collection of machines and equipment is necessary to assure financial success. At some point, the sort of company you run may need you to have access to heavy machinery in order to complete your task, move huge loads, or make upgrades.

 Although most heavy machinery is pretty expensive, there are two primary methods of acquiring equipment: equipment leasing and equipment financing. However, the two are organized differently. In either case, you will have to make payments toward the purchase price of the equipment over time.

In this article, you’ll learn all you need to know about Equipment Financing ranging from the definition to the fundamental requirements for these loans, the places from which you might get such a loan, and frequently asked questions.

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What is Equipment Financing?

Equipment financing is a useful means for ensuring that your company runs efficiently and effectively and for growing your company to meet rising customer demand. It is a sub-category of small-business loans developed purely to purchase machinery and other equipment necessary for your business’s smooth running.

Any type of machinery such as a commercial oven,  office furniture, agricultural machinery, or even a private hired taxi can be purchased by a business owner with the help of an equipment loan.

It can also be defined as a specific kind of business loan credit that assists business owners in financing all of their business’s equipment and machinery-related requirements.

Equipment financing from a financial institution can provide you with access to the funds that you require to assist your company in acquiring the necessities it needs in order to continue operating, regardless of whether the equipment in question is a piece of large machinery, specialized medical equipment, or the most up-to-date information technology devices. The main benefit of taking a loan to fund equipment is that you own the asset after the loan duration.

 Equipment Leasing

Equipment leasing is a lengthy rental contract in which a lender buys a piece of equipment and leases it to a business owner. In exchange, the business owner can use it and pay the lender a monthly fee for as long as the rental agreement is in place.

The monthly lease payment will typically remain the same throughout the entirety of the lease term, and there will be no additional interest charges. However, the monthly payment will take into account any interest that may be associated with the lender’s cost of the equipment.

 The equipment is returned to the lender after the lease expires. However, the business owner typically has the option to extend the lease or renew the rental agreement after some time. Leasing requirements are often less stringent than financing requirements.

The main benefit of leasing is that you don’t have to worry about your equipment becoming obsolete and losing value. However, suppose the equipment is critical for the smooth running of your business. In that case, the ongoing payments on leased equipment with no hope of eventual outright ownership may be the more expensive alternative.

How Does Equipment Financing Work-Comparewise

Comparison between Equipment Leasing and Equipment Financing

Equipment Leasing means that you are renting the equipment, but the lender continues to retain ownership of the equipment throughout the lease agreement. In financing, you are the owner of the financed equipment once all of the payments have been made, even though you are paying a monthly installment of a portion of the original cost of the equipment (plus interest).

However, each choice is distinct and comes with its own set of advantages and disadvantages to consider. Here are some major differences between the two methods;

  1. Equipment Leasing is sometimes a less costly choice when compared to taking equipment loans, particularly for the short-term, since it typically does not demand a down payment and does not entail paying a high rate of interest.
  2. Obtaining a loan to acquire equipment may be impossible if the business owner cannot make the required down payment or meet the lender’s eligibility requirements but leasing it requires less demanding processes.
  3. One of the major benefits of owning rather than leasing equipment is that when the loan is paid off, the firm owns a valuable asset. If the firm needs money for anything else, such as expanding operations, the newly bought equipment may be leveraged as loan collateral to receive better terms.
  4. In the long run, Leasing can become more expensive than loaning in case the equipment is used at a constant rate. But purchasing it through the use of equipment loans makes the equipment is yours.
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How Equipment Financing Works

Depending on the qualifications of your business and the equipment financing firm that you work with, you may be able to get a loan for the purchase of equipment that is equal to the value of the equipment that you want to buy. The loan is repaid over a period of time with interest.

The lender may request a hold on to the equipment, other business assets, or even a personal guarantee from the business owner as collateral for the repayment, similar to how an auto loan works. If you are unable to repay your loan, the lender might confiscate the collateral, even your assets, if you issued it as a personal guarantee. It is important to analyze the loan conditions to understand the risk involved thoroughly.

Some lenders that work with small businesses may also be willing to pay for “additional expenses,” which include things like warranties, delivery, installation, and other one-time charges that are necessary to get your equipment running.

Depending on the lenders, some may finance these fees on top of the entire value of your equipment, giving, for example, 130% financing in total, 100 percent financing for the equipment, and 30% percent financing for additional expenses. While other lenders may just finance a portion of the total cost of the equipment, for example, 80%, and then allocate the remaining funds from the loan (20%), which would go for the additional expenses.

How Does Equipment Financing Work-Comparewise

Criteria for Getting Approved for Equipment Financing

Compared to other equipment, heavy machinery are extremely costly and precious, making it difficult to obtain financing or lease, especially if your company is experiencing financial difficulties. Most heavy equipment finance companies just need to know that your company is in excellent financial standing and that you’ll be able to make all of your payments on time. You may be required to supply the following information in order to be considered for heavy equipment financing.

How long your business has been in existence

The majority of lenders are more likely to engage with a company that has been in operation for a longer period. This is because age frequently indicates expertise and increases the level of trust. A start-up business may still be accepted, but you’ll need a sound business plan and predictable income rate to qualify.

Basic business information

Before approving a heavy equipment loan, a business plan that defines your company and a thorough strategy for future development might be required by lenders. The primary purpose is to provide a detailed overview of your company to potential lenders.

Important documents such as your business’s bank tax returns for the previous year, business bank statement, a price quote from a licensed vendor, and personal government identification of the business owner such as a driver’s license or passport can also be required to verify your authenticity as the business owner.

Debt to income ratio (DTI)

The ratio of your debt payments per month to your gross monthly income is referred to as your debt-to-income ratio (DTI). It is one of the factors that financial institutions use to assess the risk associated with providing you with credit. Loan providers may also require a balance sheet or cash flow statement, and these documents aid lenders in determining the financial stability of your business.

A healthy company income flow is one of the essential requirements for excellent financing. Lenders want to know that you’ll be able to make all of your payments on time, so if your company’s debt-to-income ratio is high, your chances of being approved will reduce.

Credit score

A credit score is a numeric evaluation of how likely it is that a lender will grant you credit. It assists creditors in deciding whether or not to provide you credit and the terms and conditions of that loan, and the interest rate that you will be charged.

The better your credit score, assets, and current/projected income, the simpler it should be to obtain a favourable loan agreement. You can calculate your personal and business credit ratings online if you’re unclear about your current credit score.

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Where you can get Equipment Financing as a business owner

There are several places in Canada where you may submit an application for equipment financing, including heavy machinery. The following are good examples:

Financial Institutions

Several financial organizations provide loans for the purchase of equipment. It is more convenient for some business owners to borrow money from their local bank or credit union as they may be eligible for various customer incentives, including cheaper interest rates, more extended repayment periods, and other perks. The underwriting standards of traditional bank lenders are likely to be more stringent, but they often provide favourable rates and conditions.

Online Loan Providers/ Lenders

This kind of lender is better suited for new businesses that don’t match the minimal standards of bank lenders in terms of their credit history and assets. So if you are unable to get a loan from a bank or would just want to investigate other avenues of financing, you may be able to discover an alternative lender that provides more flexibility in your repayment terms. Privately financed loans could sometimes be lesser. Qualifying is typically quicker and simpler since lenders are more interested in your income.

 On the other hand, the interest rates and conditions may not be as favourable as those offered by a conventional bank loan. Examples are Credibility Capital, OnDeck, Priority Lending, and others.

How Does Equipment Financing Work-Comparewise

The General Interest Rates and Terms of Equipment Financing

The interest rate is a proportion of the principal, which is the amount borrowed that a lender charges. For instance, after taking a loan and it comes to an agreement, the lender will charge a certain percentage of the initial amount loaned as the interest rate.

Repayment agreements and interest rates associated with equipment loans differ based on criteria such as the financing company or lenders, the qualifications of your business, and the amount of time that it is anticipated that the equipment you are acquiring will have worth.

In general, Equipment loans often have terms that are determined by the expected longevity of the equipment purchased. If the term is too short, you may find yourself hurrying to make the payments, while if the term is too lengthy, you may find yourself continuing to make payments on the equipment even after you have stopped using it.

How Does Equipment Financing Work-Comparewise

How to Get Equipment Loans if You Have a Bad Credit Score

If this is a question you have in mind, Yes, it is possible to get a loan even with a bad credit score, but the process is quite difficult. Here are a few tips that can increase your chance of getting Equipment loans despite having a bad credit score;

  1. First and foremost, settle any past-due payments associated with your company.
  2. Put in an application with an alternate or online lender that has more lenient approval requirements.
  3. Provide the lender with some quality collateral to lessen their concerns about loan repayment.
  4. Maximize both the revenue your company currently generates and that which it anticipates receiving. Employ new methods that will help your business to boom with sales.
  5. If you have just been freed from bankruptcy, you should hold off on applying until your finances and credit score have improved significantly.

Before you apply for heavy equipment financing in Canada with a bad credit score, keep in mind that alternative lenders charge higher interest rates on small amounts of financing, including shorter repayment terms.

Benefits of Equipment Financing

  • It is a cost-effective choice for business owners, particularly if you decide to go with a secured loan.
  • Budgeting and managing your finances is simple.

In most cases, equipment financing allows you to spread the expense over time with predictable payments. This makes cash flow management a little bit easier and frees up your attention to concentrate on operating your business.

Ownership of Equipment

Once the loan is paid off, you will own the equipment entirely, making it possible for you to acquire the equipment your company needs to expand.

Business growth and flexibility

It makes it possible for you to purchase the equipment your business needs to expand. If you acquire one heavy machinery through a loan and then your company begins to develop, sales will increase significantly.

Availability of additional credit lines

The ability to access additional lines of credit is one of the sometimes overlooked but significant benefits of financing equipment purchases rather than making complete purchases. Equipment financing is often a predictable monthly price; as a result, you are able to get several types of equipment loans in addition to it. It makes it possible for businesses to get the necessary equipment and take out a loan to finance other areas of their operations, such as advertising.

How Does Equipment Financing Work-Comparewise

Disadvantages of Equipment Financing

  • Cash flow in your business may have difficulties due to the payments until the loan is completely repaid.
  • If you are unable to make the payments, it may do major harm to your credit and perhaps force you to close your business.
  • If you are unable to keep up with the payments, it may do significant harm to your credit and may even force you to close your firm.

There are too many choices

Because there is such a wide variety of finance alternatives and significant tax benefits available, it is possible that you may require assistance from your accountant in order to select the most appropriate equipment finance solution for your needs.

Out-of-date equipment

You’ll need to either sell or get rid of the financed equipment if it becomes obsolete. At this point, it doesn’t matter when the loan was paid off or when the machine was acquired.

Required Down Payment

This varies and depends on the rental agreement. In a case whereby a huge down payment has to be made, this puts the business owner at an advantage.

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September 13, 2022
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FAQs about Equipment Financing

What credit score do you need to apply for an Equipment Loan?

If you want to acquire the most favourable rates and repayment conditions on equipment financing for your company, you should aim for a credit score rating of at least 650 to 700. Some lenders, however, are ready to disregard these restrictions, allowing credit scores as low as 550 or even all credit ratings.

What are the factors to look out for when choosing an Equipment Financing Firm?

As a business owner, to pick an Equipment Financing Company, you have to consider some factors such as The types of financing choices available, the types of equipment that might be acquired, the average speed for both credit assessment and funding, the costs and fines associated with the loan, and the borrower criteria.

What is the meaning of Heavy Machinery Financing?

 Heavy equipment financing is the kind of financing that assists you in covering the basic price of almost any heavy equipment or vehicle that operates only under the supervision of a qualified operator who has the appropriate credentials. Heavy equipment can be anything from a bulldozer to an excavator, forklift truck, cranes, and even tractors.

What kind of equipment can you purchase through equipment financing?

Any machinery that generates revenue or reduces the time and effort needed to complete a task is eligible for financing. Whether you're buying an industrial machine to make your business more efficient, replacing an aging piece of equipment, or upgrading to the latest technology, we can help. We offer flexible terms and competitive rates to get the financing you need when you need it.

How long is the financing period for equipment?

Equipment may be financed for periods ranging from one year all the way up to seven years (1-7years). The duration of an equipment loan is determined by various criteria, including the cost of the equipment, the likelihood of it losing value, and the length of time the lender is prepared to extend the loan.

When it comes to financing equipment, what should I try to avoid doing?

The duration you can take out the equipment loan is determined by various criteria, including the cost of the equipment, the likelihood of it losing value, and the length of time the lender is prepared to extend the loan. Also, Before you make a purchase, think about how vital the equipment is to you, and make sure you're aware of your capacity to make timely payments.

What types of businesses and industries utilize equipment loans?

Equipment financing is available in an almost uncountable number of businesses and areas. Here are the examples of some;

  • Construction companies (Cement mixers, Bulldozers)
  • Office (Photocopy machine, CCTV/ Security equipment)
  • Vehicles used in farming ( Tractors, Ploughs)
  • Medical care sector (life support systems, Laboratory equipment)
  • Restaurant (Buffalo choppers, refrigerators)
  • Transportation (Buses, Trucks)

Is it more cost-effective to lease or purchase equipment?

While each lease and loan is unique, leasing typically reduces monthly payments because the lender retains ownership of the equipment. On the other hand, leasing can end up being more expensive in the long run if the equipment is required after the lease period has expired. It is better to weigh your options well, and this, in turn, determines which of the two is more cost-effective.

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