Whether your business needs to start a new product line, grab an overseas project, or manage seasonal demands, equipment financing can help you. It is mainly used to buy machinery, equipment, or vehicles.
One of the common types of equipment finance is equipment leasing, which allows businesses to use the equipment without owning it outright.
In this, the equipment itself works as collateral to get the cash for important business purposes. It proves helpful for businesses when they want equipment without purchasing it upfront. It is an important part of ensuring seamless business operations and expansion.
In general, equipment financing falls into 2 categories:
Capital Lease Capital leases are generally long-term agreements. In this, a business purchase equipment for long-term use. In most cases, business owners buy the equipment by the end of the lease.
Operating leases is somewhat opposite of capital lease. They are short-term lease agreements, and one can cancel them before the lease term ends. Businesses use an operating lease when they intend to employ the tools in the short term. They may also replace the equipment after the end of the lease term.
What Does Equipment Lease Financing Imply?
Equipment lease financing allows small businesses or startups to buy equipment without tapping into their cash reserve or capital. Instead of getting a working capital loan, one can instead explore equipment financing.
Businesses needing equipment to grow but cannot purchase it outright can consider equipment lease financing. In this, the business owners can spread the cost of the loan. Typically, a business can finance equipment for 7 years. However, the length may vary as per the equipment type and the depreciated value of the equipment.
What can one purchase with kit finance?
You can operate tools finance to purchase a range of services. From hardware to software to manufacturing and manufacturer. Check the things below you can buy with equipment finance:
- Equipment (Industry-specific)
- Office furniture
- Commercial vehicles
Who can qualify for equipment financing?
The FCA (Financial Conduct Authority) regulates business equipment financing. There is a criterion that regulates the equipment financing eligibility criteria. The lender reviews the asset as per these parameters:
Apart from that, one needs to pledge collateral over the loan. Lenders look for hard assets to seal them with security. It could stand in the form of money or property. However, soft assets like software, websites, and staff do not verify as pledge-able property.
Now, let’s explore the primary question.
Types of Equipment financing options
While you may not know, there are different ways to purchase equipment. Let’s quickly explore these business equipment financing options:
Business loans for equipment
It is one of the OutFront ways to purchase equipment. Under this, you can explore different business loans for equipment lenders. Settle with the one that hosts fairly affordable terms and conditions. You can either for a secured or an unsecured business loan.
An unsecured business loan is ideal in case you la collateral but need equipment urgently. In secured loans, one can easily qualify by taking up something as collateral. However, in unsecured loans, the interest charge may be more heightened. The lender may take the collateral back in case of defaulting on the secured loans.
It is a good opportunity to purchase equipment if you do not wish to buy it outright. Under this, a business takes equipment on lease and has to pay a fee. Depending on the lease agreement, you can either pay the full amount, return the equipment or upgrade it.
The lenders, in this case, offer a fixed loan term and repayment. It makes the loan feasible and manageable. Identify the prospect of any equipment before buying it on lease. Determine if the equipment critical for your business or not. It is generally easier to qualify for than other forms of equipment financing.
Moreover, it is one of the affordable forms of equipment financing. It does not require a business to put up a huge upfront or down payment and is available at affordable interest rates. The business can upgrade the old software and the computers to new and responsive ones. In this one, do not worry about the equipment becoming obsolete as it can always upgrade it.
Equipment Hire Purchase
In this, a business can budget for the equipment up until the term. Once you complete the term and the payments, you can own the equipment. It is ideal and helps a business avoid putting up a huge upfront to buy equipment. Equipment Hire purchase help to sustain business capital. Generally, an Equipment Hire purchase includes things like:
- The identifying characteristics of the vehicle or equipment
- Restrictions on using the equipment
- Who will maintain or ensure the maintenance costs of the equipment-
- How will the tools be provided and returned
- How will the owner be compensated for the rental?
- How much will the equipment rental cost?
- Whether the equipment hirer provides the equipment insurance or the damage deposit in case of unforeseen?
- How long is the lease period?
Does the hirer share the authority to purchase the equipment after the loan term completion?
Generally, businesses prefer to Hire a purchase agreement to an alliance with a known one. Written terms and conditions will help both parties know their responsibilities and rights.
Operational Lease Equipment Financing
It is an ideal option when you share the momentary need for the equipment. It is not related to future equipment investment or equipment purchase. A small business can buy equipment on an operational lease and return it before it depreciates. In this, the lender shares 100% of the equipment, and the borrower must pay for the equipment maintenance costs.
Advantages and Disadvantages of Equipment Financing
Thus, you now have a tab over how to finance the equipment for your business needs. Equipment financing could have other implications too.
- Your business gets exposure to the apt equipment without any upfront expenses
- Some companies or providers cover the equipment maintenance costs
- Seasonal businesses may benefit from the flexible quotes
- A business could lease a wide variety of equipment to test its usability.
- Help you build a business credit score
- The business must be VAT registered; else could be rejected
- Leasing for long periods could prove costlier
- You do not own the equipment outright except in the Hire purchase option
- Tax implications may vary
- It can prove expensive if your business does not perform as per expectations
These are some popular forms of equipment financing options. Every business must analyze the available resources and equipment requirements before financing. Analyze the long or short-term use.