Equipment financing is used by businesses to promptly purchase equipment. which helps them to grow their overall business profitability.
In this article, "What is Equipment Financing its example, benefits, and disadvantage" we will discuss the minor to major things which you must know. So, read this article till the end.
What is Equipment Financing
A type of loan through which we purchase new or used equipment for business purposes is known as equipment financing.
In this lender, provides you with cash. So that you can purchase the equipment, and make monthly payments over a specific time until the loan is fully paid.
This type of financing is commonly used by companies that do not have sufficient funds to purchase equipment or machine.
What is an example of equipment financing?
Suppose, there is a construction company that requires a new bulldozer but it does not have enough funds to purchase a bulldozer. So, here this company can apply for equipment financing. Through this lender pay all the necessary funds to the company which is required for the bulldozer purchase. After that, this company will have to make monthly payments until the loan is fully paid with interest rates.
Who is eligible for equipment financing?
Equipment financing is available for a wide range of enterprises. Such as small, medium, and large enterprises. To be eligible for equipment financing the enterprise should consist:
• ownership proof
• good credit history
• clear business plan
• a solid reason to purchase the equipment
What are the benefits of equipment financing?
There are several benefits of equipment financing. Here are the top 5 of them:
1. Conserve cash flow
Through equipment financing businesses Conserve cash flow which they can use for other businesses' needs. Such as sales and marketing, payroll, inventory, research and development ( R&D ), etc.
2. Tax benefits
Another benefit that business gets from equipment financing is tax benefits. Such as depreciation and interest deductions.
3. Up to date
equipment financing allows businesses to purchase the latest equipment through which they can increase their productivity and overall financial health of a business.
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3. Preserve credit lines
Through equipment financing, you can Preserve credit lines and use them in emergencies, expansion, marketing, or other.
4. Flexibility in payment
equipment financing offers Flexibility in payment options. This means companies can choose financing options such as equipment loans, lease financing, or equipment leasing, according to their needs.
5. Approval process
The time required for the Approval of equipment financing is less than traditional financing such as banks. This allows businesses to promptly purchase equipment without any disruption.
What are the disadvantages of equipment financing?
There are several merits of equipment financing. But it also consists of disadvantages. Here are 4 common disadvantages of equipment financing which consist:
1. Overall cost
The equipment financing can consist of high interest rates which can affect your business's financial performance in the future. So, it is important to read the term of the financing agreement before signing it.
2. Obligation to repay
It is not sure that the equipment you purchase through equipment financing will 100% grow your business. If due for any reason, the equipment fails or breaks then at this condition also you have to make regular payments until the loan is paid off.
3. Collateral
In some cases, the lender may require collateral for the security of the loan and if you are unable to pay the loan then the lender has the right to seize the collateral for loan recovery.
4. Limitations
Once you have signed the equipment financing agreement for a specific equipment then you can not modify the term or upgrade to another equipment. In some cases, it may be possible with additional costs or refinancing.
What is the difference between asset finance and equipment finance?
Asset finance and Equipment finance is the same because both of them are used to purchase assets for a company's growth. But there are some differences between them.
| Asset Finance | Equipment Finance |
|---|---|
| Asset Finance can be used to purchase a wide range of assets. Such as machines, vehicles, etc. | Equipment Finance is only used to purchase equipment. |
| In Asset Finance, both leasing and financing options can include. | Equipment Finance is generally structured as a loan |
| Asset finance can be used to purchase new or used assets | Equipment Finance is generally used to purchase a new equipment |
Overall, in asset finance, we can purchase multiple assets whereas in the case of equipment finance, we are limited to the purchase of equipment.
What is the difference between equipment lease and finance?
equipment lease and equipment finance both are used to acquire equipment for a company. But there are some differences between them.
| Equipment Lease | Equipment Finance | |
|---|---|---|
| Ownership | In the Equipment Lease, the ownership of the equipment is owned by the leasing company. | In Equipment Finance, the ownership of the equipment is owned by the owner of the company |
| Payment | In this, the companies make regular payments to the leasing company for the use of equipment | In this, the company makes regular payments to the lender until the loan is fully paid |
| Contract Length | The length of the Equipment Lease is generally 1 to 5 years | The length of the Equipment Finance is generally 5 to 10 years. |
| Contract | In this, the company has to return the equipment to the leasing company after the end of the contract | In this, the company owns the equipment after the end of the contract or when the loan is fully paid |
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Is equipment financing secured or unsecured?
Equipment financing can be secured or unsecured it depends on the lenders, the terms and conditions in the equipment financing agreement, and the borrower's creditworthiness.
For instance: In Secured equipment financing, the lender generally requires collateral from the borrower, and if the borrower is unable to pay the loan amount then the lender has the authority to seize the collateral to recover the losses of the loan.
In unsecured equipment financing, the lender may not require collateral but charge a high-interest rate with strict eligibility criteria.
Is equipment financing considered debt?
Yes, equipment financing is considered debt. Because in equipment financing the company borrows a debt from the lender for the purchase of new equipment. After that, the borrower has to make monthly payments until the loan is fully paid with interest rates. In the balance sheet, this loan is considered a liability which means it is in the form of debt.
equipment finance interest rate
The interest rate for equipment finance depends upon multiple factors such as the borrower's creditworthiness, lender requirements, the type of equipment being financed, the term of the loan, etc.
But usually, interest rates for equipment finance can be from 4% to 30% and the average interest rate is 5% to 20%.
When determining the interest rates the lender may consider the financial health of a company, the credit score of a company, and the equipment being financed.
If the company has a high credit score and better financial health then the lender can charge less interest rates.
The type of equipment being financed also plays a vital role in interest rate if the equipment contains high risk then the lender may charge a high-interest rate, but if the equipment contains low risk then the lender may charge a less interest rate.
[ Note: A company needs to shop around and compare the interest rates of multiple lenders. After, that choose the loan which best fit for the company. ]
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