A Beginner's Guide to Equipment Financing
Equipment Financing and Leasing:
Equipment financing/leasing is ubiquitous. Businesses (large and small) use it for all types of equipment and software on a regular basis and you’ll be hard pressed to find a business that doesn’t rely on it in some form. However, ubiquity ≠ simplicity.
Equipment financing programs come in so many different forms with their own legal jargon and litany of payment options that trying to compare these factors across multiple lenders for the first time is liable to make the mind go numb.
Luckily, you can easily learn the basics required to get a head start on finding the right program for your business.
Lease vs. Loan:
Most lenders typically offer lease and loan programs for most equipment (although some leases are only available for specific equipment) and deciding between the two can be difficult if you’re not sure what you’re looking for.
On a broad level, the main differences between a lease and a loan are ownership and term length. A lease is like a rental agreement on a set term while a loan is when you borrow the money to purchase your equipment. At a closer glance, lease and loan programs generally differ in pricing and flexibility.
Leases:
Leases are often the cheaper and more flexible option over loans in the short term. They generally have lower monthly payments than a loan and operating leases will give you a few options once the lease is up: renew the lease, terminate the lease, or purchase it outright-either at its current market value or a small buyout price depending on your type of lease.
These factors make leases especially useful for businesses that regularly upgrade equipment or rapidly expand and require the flexibility that leases provide.
Financing:
An equipment financing trades the flexibility and lower monthly payments of a lease in the short term with reliability and cost efficiency in the long term. When you sign on to an equipment loan, you’re borrowing capital from a lender and paying it off over time (typically from 36 – 84 months. Most equipment loans won’t be able to match the short-term benefits and pricing of a lease, but they make up for it with long-term tax advantages and reliability.
Overall, equipment loans are best for businesses who want to make a long-term investment in their equipment.
Lenders:
Just as equipment financing is ubiquitous, so are its providers. There are hundreds of equipment financing lenders across the country with their own pros and cons. Comparing interest rates and terms takes time as most equipment lenders look at factors such as your credit history or time in business before offering you any programs. Skipping on the research, however, can become extremely costly. Luckily, you can categorize lenders to help simplify your search.
Banks:
Banks are one of the first and only choices for many of those seeking equipment financing – and for good reasons. They’re reliable, secure, and often have competitive rates. But that’s not to say that banks are without their own drawbacks.
For starters, banks usually have much tighter underwriting requirements in terms of credit scores, time in business, and projected revenue. This can often bar startups or businesses with challenged credit from getting financing. Banks are also less likely to touch used equipment or out of the box deals like private party sales.
In-house:
An in-house financing program is exactly what it sounds like. Instead of going through a third-party lender, you borrow capital and make payments to the manufacturer or dealership. In-house programs boast competitive rates and convenience thanks to their short application process.
However, in-house financing usually suffers the same issues that banks do when it comes to their lack of flexibility for new businesses, those with challenged credit, and those selling used equipment making it difficult for less established businesses to qualify.
Commercial Lenders:
Commercial lenders get capital from outside sources such as banks and equity firms to fund their loans or leases. As a result, commercial lenders are more likely to have less competitive rates than in-house lenders and banks in order to make a profit.
What commercial lenders lack in rates, they make up with convenient applications, looser underwriting requirements, speed, and flexible programs. Businesses will often stick with commercial lenders if they sell depreciable equipment or deal with a lot of customers with less rigid credit situations.
Brokers:
Equipment financing brokers are unique in the financing industry because they don’t offer their own programs. Instead, brokers work with multiple lenders to find a program for each applicant. Because they work with multiple lenders, you’ll often get the most flexibility from them in exchange for less competitive rates.
Brokers use their expertise to do the shopping for you, turning a process that could take weeks into a few days.
Getting Started:
Getting started on equipment financing or leasing is a lot like shopping for a car or home: all you need to know is what to look for and everything else should fall in place. Now that you know what options are available to you, it’s time to start looking for potential lenders that best fit your business needs.