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Business Equipment Financing and Leasing: What Is It, How to Apply for It and Who Qualifies?

Not only does it take money to make money, but for most business owners, it also takes equipment. Every day, business owners are surrounded by equipment that’s crucial to their operations. Sometimes those things break or no longer meet the demands they were purchased to meet in the first place. It’s an all-too-true reality that one costly piece of equipment can sometimes mean the difference between profit and a deficit.

Equipment loans and leases help businesses tosecure the machinery they need to keep operations running smoothly and successfully. Whether it’s a freezer for an ice cream shop or a conveyor belt for a factory assembly line, businesses can seek an equipment loan or lease to push through production, create and deliver products and, ultimately, satisfy their customers without the financial strain of buying the machinery outright.
Business equipment financing can seem incredibly complex, but in reality, companies can apply for new or used equipment financing and receive an answer online within a few days or, in some cases, just a few hours.
To help you better understand business equipment financing and the options available to business owners seeking these financial tools, this article covers:

What Equipment Financing Means

What Is Equipment Financing?

Equipment financing is the route to production and success for many businesses. Most small and midsize companies simply can’t dip into the coffers and lay out thousands of dollars for the new or used equipment required to get the job done, which is why they turn to banks and lenders for assistance. When a company borrows money to cover all or part of the cost of an equipment purchase, they can apply for a loan to obtain the equipment financing they need. Depending on the equipment finance options available to a company, it may be able to finance up to 100% of the value of a piece of equipment.
Business equipment loans can be used to cover the funds for new or used machinery. They allow businesses to acquire everything they need to operate with efficiency on a daily basis – whether that’s providing state-of-the-art technology for business partners to use in conference rooms or having the most efficient appliances to fry up a batch of donuts for the early morning customer rush.
Banks and lenders that offer business equipment loans are experienced in financing different types of machinery, and they’ve honed the processes for lending through the years. That makes equipment finance one of the fastest ways for companies to get access to the machines they need to start new product lines, replace broken equipment or scale up to meet growing demands for inventory.

What Kind of Equipment Can Be Financed?

A company can finance almost any type of business equipment as long as it has some intrinsic value.
When equipment is purchased on credit, the borrower pays finance fees and incurs interest costs, so companies only want to finance machinery, tools or furniture necessary for the operation of the business. Seeking a loan for equipment that it doesn’t need only results in unnecessary expenses for the company, and that’s simply bad business.
So, what does equipment mean when it comes to financing these loans? Items businesses can purchase with equipment financing funds include:

  • Machines and equipment that operate as part of an assembly line on a factory floor or move raw goods and inventory within factory, warehouse and yard settings, including conveyor belts and forklifts
  • Transportation vehicles such as those used for delivery, company cars, trailers and food trucks
  • Workbenches and tools required to build, design or maintain products or other equipment that provides service to end users (ex. plumbing or HVAC businesses)
  • Climate control equipment to ensure the proper storage of goods, including solar panels, HVAC units and refrigeration or freezer units
  • Office furniture fixtures, including lights, desks, shelves, chairs and cubicles or partition walls
  • Commercial kitchen and hospitality appliances, including ovens, ranges, fryers, grills, coffee makers, beverage dispensers and food processors
  • Payment hardware or software, including point-of-sale terminals and cash registers
  • Communication systems such as telephones
  • Business software ranging from account programs to customer management software

Understanding the Total Cost of Equipment Financing

Equipment Financing Rates

Once a company has determined whether a business equipment loan exists for the machinery or tools they require, the next concern should be the rates and terms for potential equipment lending.
The limitations to equipment financing typically relate to the creativity of the business, meaning what the lender will concede is machinery used for business purposes, the credit rating of the company or person seeking the loan and the value of the equipment being purchased. Depending on these factors, loans can range between $2,000 and $2,000,000.
How finance costs are structured depends on the lender, but financing an equipment purchase typically comes with a cost of 8 to 30% of the total amount borrowed. Consider the numbers and cost ranges below to understand the potential total of equipment loans.

Amount BorrowedMinimum Average CostMaximum Average Cost

What Is a GoodFinance Rate?

The finance rate typically refers to the interest rate or APR (covered below) , but without a clear picture of the entire loan terms, businesses can get the wrong idea about the total cost of the loan. When applying for a business equipment loan, companies should make sure they understand allofthe associated finance charges.
Equipment finance companies provide a valued service for which many businesses are grateful. But appreciation for the chance at funding doesn’t mean companies should overlook the fine print.
Consider some of the costs and terms besides APR/interest rates.

Origination or AdministrativeFees

An origination or administrative fee may be charged as a single fee at the onset of the loan and added to the total due during the term of the loan. These fees may be calculated as a flat fee, on a sliding scale or as a percentage of the total borrowed. While companies should be aware that specifics will vary by loan offer and lender, here are some examples of origination or admin fees:

  • Flat fee: $275 regardless of the amount borrowed or any other factors
  • Sliding scale: $100 plus $10 additional for every $10,000 borrowed (a loan of $100,000 would equate to a fee of $200)
  • Percentage: 2% (a loan of $100,000 would equate to a fee of $2,000)

Down Payments

A down payment may be required for businesses that don’t qualify for 100% financing. Down payments can be large. With a $1 million loan, for example, the down payment could be $100,000 or more. Luckily, down payments aren’t additional fees tacked on to the total cost of the loan, so if a business pays $100,000 down on a $1 million loan, it reduces the balance of the loan by that much. When it comes to determining a good finance rate for equipment, businesses need to understand their own credit ratings or the credit score of the principal signing for the loan. In general, the better the credit rating, the better the finance rate. A credit score of 630 or higher is typically required to obtain this type of financing. Some companies, such as Balboa Capital, work with credit scores as low as 600.

What Does Interest Mean in Business Equipment Financing?

In the scope of business equipment financing, interest typically refers to the interest rate or APR charged on the loan. In order forthe lender to make money, they charge interest on the total amount financed, meaning that the borrower pays back more than they borrowed. The difference between the total amount paid back and the total amount borrowed is the lender’s profit.
How much the lender makes offa business equipment loan depends on two factors: the interest rate and how much of the loan the borrower pays back. Companies or principal signers with lower credit ratings, poor cash flow or other financial struggles will likely pay a higher interest rate. This is because lenders are willing to offer loans to companies without perfect credit histories or financial situations, but they see those loans as somewhat of a risk. The higher interest rate is a way to hedge their bets on such a loan.

What Does APR Financing Mean?

Ultimately, annual percentage rate (APR) financing means mostly the same thing as interest financing. This rate considers the total cost of the loan, including the interest rate and any fees added to the loan. If the interest rate for an equipment financing loan is 6% but there are fees totaling $1,000, the APR will be slightly higher than 6%.
For businesses trying to decipher equipment loan interest rates to figure out the best deal from various lenders, APR is often the best factor to consider because it takes all the costs into account.

Business Equipment Financing Terms

Companies can’t base decisions about equipment loans solely on the interest rate or APR. How long the business has to pay back the money borrowed, including all the interest and fees, is a major factor in determining whether a loan is affordable.
Small business equipment can typically be financed for time periods such as six months, six years or for the life of the equipment. It is best for the terms of the business equipment loan to coincide with or be shorter than the life of the equipment. On one hand, businesses don’t want to be paying for equipment that’s no longer useful. The lender, on the other hand, doesn’t want to extend financing past the life of a machine because if the borrower defaults on the loan, there’s nothing to sell to recoup any of the loss.

The Total Cost of Finance for Equipment

The bottom line is important for any business, so companies considering an equipment loan should calculate the total funding cost before making a decision.
Take this example using some of the best finance rates available to businesses seeking equipment funds:

  • A business needs to purchase $200,000 in factory floor equipment.
  • The company qualifies for 100% financing with no originating fees and an APR of 8%.
  • The estimated life of the equipment is 10 years, and the lender agrees to a 10-year loan term.
  • Given these numbers, the company would pay $2,426.55 per month for 120 months.
  • The total outlay associated with the loan is $291,186.23.
  • The total cost of the loan is $91,186.23.

Consider another example with heavy equipment financing rates and a business or principal signer without an excellent credit history:

  • The business needs to purchase equipment for the same $200,000.
  • It qualifies for 100% financing but at an APR of 23%.
  • The terms are the same as the above example, with the business making payments for 10 years.
  • Given these numbers, the company would pay $4,270.96 per month for 120 months.
  • The total outlay associated with the loan is $512,514.72.
  • The total cost of the loan is $312,514.72.

Many small businesses don’t need to finance such large amounts, so consider similar scenarios when a company wants to borrow $10,000 for office furniture or an upgrade to a commercial kitchen.

At 8% APR and 100% financing over a term of three years, the company would pay:

  • $313.36 per month
  • $11,281.09 total
  • $1,281.09 in interest

At 23% APR and 100% financing over a term of three years, the company would pay:

  • $387.10 per month
  • $13,935.50 total
  • $3,935.50 in interest

The comparisons above make it easy to see the value in seeking the lowest possible interest rate for a business equipment loan. Companies may be able to lower the total cost of a loan by paying it off faster than the terms, but that depends on the fine print of the financing and whether there are penalties for paying down principal faster.

Determining How to Qualify for Equipment Financing

Qualifying for a loan depends on the requirements of each lender, but here are some basic guidelines:

  • Time in BusinessLenders typically want to see that a company has been in business for at least two years. Some lenders, such as Balboa Capital, only require one year, and a few lenders, including Currency Capital, don’t have published guidelines regarding time in business.
  • Credit ScoresMost lenders are looking for minimum personal credit scores of 600 to 650. These loans typically do require a personal guarantee, which means the company owner or another signer must put up personal collateral or agree to be legally responsible for the debt should the business be unable to make agreed upon payments in the future. Businesses like Balboa Capital that don’t require a personal guarantee may actually be leasing equipment with an option to purchase at the end of the term.
  • Cash-Flow MinimumLenders usually require a cash-flow minimum. They want to see that the business is bringing in enough income to cover payments on the loan in addition to other operating expenses. Common minimum cash flow requirements are $100,000 to $130,000 annually. Companies may have a reduced or increased cash flow requirement depending on the amount of funding they’re seeking.
  • CollateralBusinesses seeking equipment loans don’t typically have to put up any type of collateral. The equipment itself usually acts as the collateral, which means equipment financing works a bit like a personal car loan in this regard. If the business stops paying the monthly payments for any reason and defaults on the loan, the lender can repossess the equipment, selling it off to recoup losses on the loan.

What Amount Will a Lender Provide for Equipment Financing?

Lenders determine how much equipment financing to providebased on the value of the equipment as well as the credit history and cash flow of the borrowing company. While most lenders won’t allow businesses to borrow amounts that seem excessive in contrast to the company’s cash flow or revenue potential, the hard factor is the value of the machine or equipment itself.
Note that the price or cost of equipment is not the same thing as the value. The price is set by a specific business selling a specific piece of equipment. The value is set by the market. If a company is trying to buy an overpriced piece of equipment, it’s unlikely to be approved for 100% financing. Instead, a lender might agree to fund 100% of the value of the equipment.

Consider this example:

  • A company wants to buy a used forklift from another business, and the asking price is $12,000.
  • The lender states that, given the forklift’s age and other factors, it has a market value of $10,000. That’s the amount the lender believes the forklift could
  • be sold for at market to recoup loan losses.
  • The lender agrees to finance up to $10,000.
  • The company buying the forklift has to make a decision to:
    • Accept the financing and pay the other $2,000 out of pocket
    • Negotiate with the seller to bring the price down to $10,000
    • Pass on the deal and buy another forklift the lender is willing to finance fully

The Steps to Applying for Equipment Financing

With so much information to get to this point, businesses might think that the equipment financing process is incredibly complex. However, the truth is that companies can apply for new or used equipment financing and receive an answer online within a few days or, in some cases, just a few hours.

Here’s how to apply for equipment financing effectively and efficiently:

Step 1:
  • Find an equipment finance company that appears to meet your needs and offers the types of loans required.
Step 2:
  • Complete an online application and provide the required documentation. The following documents are usually required by equipment loan providers:
    • An image of a valid driver’s license belonging to the person or people planning to personally guarantee the loan
    • Bank statement to prove cash flow and the history of the business revenue
    • Business tax returns for additional proof of annual revenues and time in business
    • credit score
    • An equipment quote including the make or model number to indicate what the loan is intended to fund
    • voided business check to set up future EFT payments on the loan
    • Additional documents that might be required by some companies include:
      • profit and loss statements
      • balance sheets
      • financial statements for company owners
      • debt schedules
Step 3:
    • Submit the completed application with allnecessary documentationin order for the lender to conduct a credit check and review all the applicable materials.
Step 4:
  • Pending the lenders approval, loans can be funded in as little as two days, though how fast the money is received depends on the funding manner. Electronic Funds Transfer (EFT) transactions to a bank account can take up to three days, for example. Generally, businesses can expect to receive funds on an approved loan within a week.
  • Fast Equipment Finance: How Quickly Is Money Available?

    Not every company can wait a week. When the main oven goes out at a small bakery or the only widget maker in a factory breaks, the lack of funds to cover an equipment replacement costs money with every passing minute. In these cases, businesses may seek fast equipment financing.
    The fastest equipment financing can be approved the same day as the application, though this does require a company to have all their ducks in a row. Businesses can increase their chances of quick equipment funding by gathering and providing all the required documentation with the application. When the lender doesn’t have to make phone calls or chase down required documents, the process is faster and smoother for everyone.
    In some cases, the lender will approve the loan and make a payment directly to the vendor. That means the business is able to order the equipment and have it installed on credit, and the lender takes care of the invoice once it’s presented. This type of arrangement can help increase the speed with which a business is able to replace broken equipment or install new, much-needed equipment for scaling.

The Pros and Cons of Equipment Financing

  • Businesses of all sizes can leverage equipment financing to purchase heavy machinery and other expensive equipment that they could not otherwise afford to buy outright. Even if a business has the capital to buy the equipment, financing the purchase can reduce the strain on cash flow and ensure the company has the funds to meet operating expenses in the near future.
  • Since equipment financing can be handled online and the process can be completed in as little as a few hours, businesses can gain fast access to the cash they need to make critical infrastructure purchases. Plus, the equipment itself usually stands as collateral for the loan, which means companies and signers aren't putting their homes or other business assets at risk.
  • Companies can also reduce their tax burden by adding interest charges and the cost of the loan to operating expenses.
  • Equipment financing, however, is not without potential downsides, and these should be considered before applying for a loan. Perhaps the biggest issue is that equipment eventually becomes obsolete. If the loan is extended too long, the equipment might not be of use before the funds are fully repaid. The business may find itself making a choice between
  • dealing with old and ineffective equipment or funding the purchase of new equipment while still making payments on the old loan.
  • Another disadvantage is that equipment owned by a company may depreciate, meaning that as time passes, the amount a company can deduct on its taxes is reduced.

The Difference Between Equipment Financing and an Equipment Lease

When businesses search for equipment finance options, they’re likely to come across equipment leases. Equipment lease financing rates and other terms differ significantly from purchase financing in the following ways:

  • Leases almost never come with a down payment because a purchase isn’t being made.
  • A lease is like a rental of the equipment; the company leasing the equipment never takes full ownership of it. At the end of the lease, the equipment is returned.
  • In some cases, the company leasing the equipment may be offered a purchase option (or buyout), allowing it to convert the lease to a purchase with a final payment of a certain amount.
  • Leases cover almost all types of hardassets. Soft assets, such as computer software, usually can’t be leased.

Making the Final Decision About Equipment Financing

Once offers are in hand, businesses should review the total cost of financing equipment before accepting a loan. Consider the following questions:

  • Is making the monthly payment possible given the incoming revenue and operating expenses?
  • Is the equipment required to continue to bring in the current revenue?
  • Will the equipment result in increased revenue?
  • How long will the equipment last, especially when considering a lease versus a purchase?
  • Can the company can pay for the equipment without putting the business at risk to save money on finance fees and interest?

Having functional equipment is critical to the success of many businesses, and being without that equipment for even a short period can spell catastrophe for your clients and your financial stability. Lendzi can help. Our transparent terms, flexible options and fast, simple process provide business owners just like you with the solutions needed to keep operations running smoothly. Contact us for further information or start your application now.

The Pros and Cons of an Equipment Lease

Like purchase financing, leases come with benefits and disadvantages for businesses. Perhaps the biggest benefit of a lease is that the company never owns the equipment outright. This sounds like a disadvantage, but it actually removes the burden of ownership and is helpful in situations that require constant updates to equipment.
For example, if a company knows that the equipment on its factory floor will be obsolete in five years, it may be pointless to undergo the expense of financing an equipment purchase only to be in the same position later. Those who set current equipment lease rates usually understand the life of the machines and structure their pricingappropriately. Companies can then take on equipment for a lease term, upgrading to new equipment during the next term.
However, if lifespan isn’t an issue, leasing equipment is typically more expensive than a purchase. Companies that lease equipment only to purchase it at the end of the lease typically pay more than companies that purchase equipment outright via financing options.
Ownership comes with privileges. Companies that lease equipment may be limited as to what they can do with the equipment, especially when it comes to modifying or repairing the items. Leasing equipment meansabiding by the rules of the leasing company when it comes to repairs and maintenance. Businesses that purchase their equipment can have items serviced in-house or by service companies of their choice.

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