Businesses need equipment to thrive.
However, acquiring new equipment is not always easy.
It can be expensive and time-consuming, especially when your business doesn’t have the necessary cash on hand.
Luckily, there are ways to acquire new equipment without draining your treasury or taking out a loan that you can’t afford.
Equipment finance is one of those options — and it’s a great way to get what you need without going into debt (or at least more debt).
In this article, we’ll cover everything you need to know about how equipment finance works, who qualifies for it, and why it might make sense for your business. Let’s get started!
What is equipment finance?
Equipment finance is a way to pay for assets over time, but it’s different from a lease. Leasing is when you rent an asset with no obligation to buy.
In other words, you don’t own the equipment and can return it at any time, often without incurring penalties.
Equipment finance on the other hand, allows you to purchase an asset and have that cost spread out over several years based on your business’ needs.
For example: You require $5,000,000 worth of machinery in order for your factory to increase its output & supply an existing market. Your factory has a net annual profit of about $2,000,000.
You can opt to finance the equipment purchase over several years to amortise its cost.
As a result of the equipment purchase, your production capacity will increase within the first year after installation, and your net profits have now increased to about $3,000,000.
The equipment cost is reimbursed within 7 years in this example, at a fixed interest rate.
Now your business owns the equipment and achieved an increased production capacity and net profit.
How do you qualify for an equipment loan?
In order to qualify for an equipment loan, you will need to have a good credit score, a good business credit history, and a good business plan.
You also need to have a good financial history and an acceptable financial forecast. In addition to that, you’ll need projections that demonstrate your ability to repay the loan.
As long as you meet these criteria — and the bank doesn’t decide not to fund your request — you should be able to get approved for an equipment finance agreement.
The type of equipment finance you choose will depend on your unique needs and circumstances.
- Equipment leasing is a long-term rental agreement where you’re only responsible for paying the monthly payment; the manufacturer handles everything else, including maintenance, repair and replacement.
- Capital lease involves borrowing money from a lender and using it as collateral on an asset (e.g., a piece of equipment). In this scenario, you typically pay off your debt in full at the end of your loan term with interest added on top (known as capitalized interest).
- Operating lease involves renting an asset from an outside company for its useful life period (i.e., five years). At the end of that period, ownership reverts back to either party depending on how much was paid toward owning it outright during said time frame (known as residual value).
It’s okay to ask for help with purchasing new assets for your business.
If you’re in the market for equipment that will help your business grow, it’s okay to ask for help.
There are many financing options out there, but knowing which one will work best for you is key.
You need more than just a credit card or home equity loan to get started.
You also need to know what kind of equipment you need and where it would be most helpful to your business.
Equipment finance is a great option to consider if you need to purchase new machinery or assets for the growth of your business.
The process is simple and it allows you to get everything you need without having to spend money upfront, which means that there’s less risk involved in taking on this type of loan than other types like leasing.
In addition, since it’s an installment plan (with fixed interest rates) rather than just renting out something temporarily, there’s no worry about losing access when lease agreements end.
With this type of financing, small businesses can grow their operations without worrying too much about being able to afford all the necessary investments upfront — which makes them more competitive with larger companies that might have easy access.
Looking to finance your next purchase? Financely Group can help you.
We work with companies from all over the world, especially those in frontier markets, to raise financing for equipment purchases.
We’ve helped our clients purchase everything from production line machinery to industrial vehicles. If you’d like to discuss your equipment finance needs, schedule a consultation with us today!
