If you’re a new business or an established one, acquiring the essential equipment and assets required to run your company can sometimes be a difficult financial strain and disrupt the smooth running of your work.
In this article, we will go into detail and discuss how equipment financing will allow you to ease this financial difficulty and secure the assets you need. We will discuss the different sorts of finance available and the pros and cons of each so you can find the best option for your needs.
What is Equipment Financing?
Equipment financing is a lease or a loan awarded to businesses to buy business equipment. In this case, business equipment means any physical item your business requires besides real estate.
Types of business asset finance options
There are a series of options available to new businesses seeking asset financing, either a loan or lease option. A company can obtain a loan for the equipment, using the equipment itself as collateral against the loan.
Due to the high collateral against the loan, the lender tends to lend up to 80% of the equipment’s value, this means you may still need to make a sizable down payment.
The benefit of business loans is that once the loan is paid off the borrower becomes the legal owner of the equipment.
The second option, equipment leasing, comes in several structures and allows the borrower a short-term, less expensive alternative to a loan if the down payment cannot be afforded or if they can’t qualify for the loan.
Why do businesses need asset financing?
Buying the necessary equipment to start up a new business can be very expensive and disrupting to business operations and cash flow. Asset financing allows companies a way to purchase equipment without this costly disruption.
How Can I Get Equipment Financing?
The process of acquiring equipment financing is straightforward, due to the nature of the collateral you will offer against the loan being the equipment that you will get with the finance. This also makes it easier for those with less extensive or impressive credit scores.
What are the requirements for securing business equipment financing?
Securing business equipment financing can be easier than securing a typical loan as they are beholden to fewer financial restraints.
The equipment you’re purchasing with an equipment loan will be used as collateral, so it’s unlikely you will be asked to put up any collateral as defaulting on the loan means the lender will simply claim the equipment back.
Due to this, there is less stake in your business’s credit score or business financials. The acquisition of an equipment loan can vary depending on your overall business finance, credit score, and the cost of the equipment.
Upon complete repayment of the debt, the equipment becomes legally yours.
How Does Equipment Financing Work?
Equipment finance allows you to finance up to 100% (although 80% is more typical) of the cost of expensive equipment by taking up a loan with a lender.
The lender covers the cost of the required items which you will pay off in regular payments. If the regular repayments are made on time you will have full use of the equipment by the end of repayment, otherwise, the lender claims the equipment as collateral.
What Can You Use Equipment Financing for?
Equipment finance can be used for a massive variety of expensive equipment needed for your business. Essentially any item required for the successful running of your business can be received with equipment finance.
Equipment that can be acquired via business finance can be split into two groups: hard and soft assets.
Hard assets refer to more traditional specialist machinery and vehicles etc. Soft assets are when the lender sees the equipment as less financially secure. Soft assets include software, IT equipment, security systems, or gym equipment.
What Types of Businesses and Industries Use Equipment Financing?
Any company which requires the use of expensive technology to perform their business can use business finance.
These can include but are not limited to –
- Haulage and transport
- IT and office businesses
- Manufacturing and heavy industry
How Long Can You Finance Business Equipment?
The length of your business equipment financing can depend on a variety of variables, including the price of the equipment, how likely it is to lose value, or for how long the lender is willing to lend.
It’s possible to finance equipment for as little as 12 months up to 7 years, though most lenders tend not to extend to over 5 years.
Equipment Financing Interest Rate, Fees & Terms
The interest rates in equipment finance can vary between 6%-10% and sometimes, though rarely, up to 44% based on factors including the cost of equipment or your business’s qualifications.
You will generally not be required to pay any fees beyond an initial down payment and VAT.
The length you can finance equipment for is also dependent on the cost of the equipment and the health of your business.
Most businesses must be able to display suitable assets or inventory to qualify, but due to their nature, equipment loans are easier to secure.
Is My Business Eligible For Equipment Financing?
Business finance exists to assist established and small businesses in finding a foothold in the market by allowing them to purchase new equipment. Because of this and the simple terms of an equipment loan, most businesses will find they are eligible for equipment finance.
With the loan being staked against the asset purchased instead of business finances, lenders are more likely to lend even to smaller businesses as claiming the asset back is a simple, risk-free resolution.
The main obstacle when acquiring an equipment loan is the initial down payment, which can be sizeable due to the upfront cost incurred by the lender. If your business lacks the assets or cash flow to cover this cost, equipment leasing is a workable alternative.
The Pros and Cons of Equipment Financing
- Using equipment finance to cover the price of costly equipment will improve cash flow, allowing you to spend your funds on the important day-to-day running of your business. This is especially beneficial during the difficult early years of your business.
- These loans are also easier and faster to get than traditional bank loans which are mired in financial covenants.
- Business finance allows you access to state-of-the-art equipment that would otherwise be outside of your price range.
- Fixed interest rates allow for reliable budgeting.
- Equipment finance is tax efficient as the equipment is entirely for your business, the loan is tax-deductible.
- As business equipment financing requires no collateral means if you do find yourself unable to make the repayments, the asset is simply reclaimed as well as fees incurred
- By its nature, asset finance is restrictive and is only for equipment, meaning that the money cannot be used for any other purpose.
- If the purchased equipment breaks or malfunctions the responsibility lies with you to fix it, coupled with the monthly expense of repayments this would be a difficult situation if unprepared for.
- Once the asset has been paid off and is legally yours it may have depreciated in value and effectiveness, in which case you will be left with a piece of kit that no longer best suits your business’s requirements. This is an issue you wouldn’t have to face with an equipment lease.
Can My Assets Be Repossessed?
As the asset acquired via your equipment finance loan is the primary collateral on your loan the lender will repossess the equipment acquired by the loan.
Can I Get Equipment Financing If I Have Bad Credit?
A bad credit score either for you or your company is one factor a broker will take into account when considering your application.
Others are how long the business has been operating, the projected value of the purchased business equipment, and the length of the loan term.
Who Offers Business Equipment Financing?
A wide variety of specialised brokers offer equipment finance in the UK. There are also a host of comparison websites detailing rates and loan lengths making it easy to decide which is best for your business.
Alongside specialist brokers, every national bank offers equipment finance, each of them offering a host of competitive rates and terms. That being said, banks may require more stringent checks before offering asset finance.
Whether you’re starting up a new business or in an established business looking to upgrade your resources without disrupting cash flow.
Business finance gives you the freedom to purchase whatever necessary asset your business requires in a straightforward loan arrangement that is geared towards giving new businesses a solid start without having to juggle the burden of an outright purchase.
And if the loan structure is unattainable for your business currently, an equipment lease offers an easy, zero-commitment alternative.
What is equipment leasing?
An equipment lease is a cheaper and less demanding alternative to an equipment finance loan to acquire new business equipment. There are several options to consider if choosing equipment leasing.
Hire purchase allows the borrower to purchase assets by paying for them in fixed monthly instalments. Easier than hiring, the borrower will eventually become the legal owner of the equipment once the full price is paid. Generally, VAT and a 10% deposit will be required upfront
A finance lease, also known as a capital lease, allows the customer to hire the asset indefinitely or for as long as it is useful.
Once the lease period has been reached the borrower can either continue using the item on a secondary, generally cheaper, lease, returned to the lessor, or sell the equipment on and keep a cut of the sale price. This is a similar choice to hire purchase with a lower upfront deposit.
One of the most straightforward forms of borrowing is operating leasing, which allows the borrower to lease the item for a period of its useful life. Using operating leasing allows freedom over the time the equipment is borrowed for and entails none of the risks of ownership entailed in asset finance.
How are equipment loans secured?
Equipment loans are great due to how easy they are to apply for and how quick the turnaround is on receiving the money once the application is complete. Most banks will ask you to complete a form detailing your business’s financial particulars which will be assessed in short order.
Other smaller brokers ask you to complete an online eligibility check and form.
What is the difference between equipment leasing and equipment financing?
Equipment finance is a long-term commitment loan that requires long-term stability from your finances to cover the cost of the new equipment. Once the loan has been repaid you will become the legal owner of the asset.
Equipment leasing offers more freedom and less of a commitment by allowing the borrower to lease the required items. The borrower does not become the owner of the asset as they would with equipment finance.
What are the risks of financing long-term assets with short-term liabilities?
When taking out equipment finance it is always pertinent to ensure that your cash flow is reliable enough to cover the full course of repayments.
Any collateral that you offered against the equipment finance may be at risk if you default, as well as it affecting your credit rating thus making future lines of credit for similar loans harder to obtain.
If payments are missed the lender may increase your interest rate for future payments.
Most brokers will ask that your business has been running for a certain period, or that it has cleared a certain profit before offering you equipment finance. Either way, it’s prudent to ensure your liabilities can cover the cost in the long run