It is quite common for a business to seek to replace an old piece of equipment, or even to purchase an additional unit to the existing ones. The reason for this varies from each business. But in most cases, a business could be seeking to expand production or speed up the production process with the latest piece of equipment. However, a good number of businesses are unable to fund such purchases on their own, hence the need for equipment financing. Firms who opt for financial assistance sometimes do so in order to spread out the cost of the piece of equipment over a long period of time so that liquid cash will be available to fund other business activities. In fact, the financing industry for equipment in the United States is such a huge industry; in 2015 alone, a report showed that investment $1.5 trillion out of which 68 percent was financed. It is even predicted that by 2020 the market is estimated to grow to $1.8 trillion of which $1.24 trillion is expected to be financed. Equipment that can be financed includes manufacturing equipment, farming equipment, healthcare equipment, restaurant equipment, construction equipment, and so on.
Distinguishing between an equipment lease and an equipment loan
Before looking at equipment financing detail it is important that it is distinguished between equipment loans and leasing—two terms which are often thought to mean the same thing. On the one hand, an equipment lease is suited for businesses with little or no capital. The down payment required for an equipment lease is much smaller—if at all is requested—than that of financing. Leasing enables the business to finance about 100 percent of the total cost of the equipment including some 25 percent of additional costs such as those from taxes and delivery. Leasing provides small businesses with a more flexibility in that the equipment can be returned at the end of the lease, or the business can choose to purchase the piece of equipment for a small amount insofar as the principal has been paid in full. In a nutshell, an equipment lease allows a business to use a piece of equipment while making a monthly payment for doing so. An equipment financing loan, on the other hand, allows the business to claim the equipment and its depreciation on its books. While an equipment loan could help a business reduce its tax bill, an equipment lease might be a better option for business owners who wish to sell their business as the debt incurred is kept off the balance sheets.
Taking a Closer Look at Equipment Loans
Equipment loans are secured loans which a business can obtain from commercial banks or other alternative sources of funding that offer equipment financing. These loans are secured only by the equipment that is being purchased and as such no other additional collateral is required. In general, equipment loans are issued to businesses in order to enable them to make a purchase or large piece of equipment which are known to retain their value over a long period of time. One thing about equipment loans is that it requires lesser documentation as compared to other forms of financing such as SBA loans; it can even be funded within a space of a week. The speed with which an equipment loan can be processed makes it a desirable option for businesses which are looking to quickly boost production levels in order to— for instance—take advantage of a new market.
Terms of an equipment loan—interest and payment duration
Equipment loans are also attractive to small business owners because of the single-digit interest rate of between 6 to 9 percent which they attract. It is also possible for a business with a very good credit score and which has made a much greater down payment to be offered smaller interest rates. The reverse is also true for businesses with low credit score which might attract higher interest rates than normal, especially if the down payment is also little. Equipment financing in the form of a loan usually has fixed terms, that is, the interest rate and payment period are usually fixed at the onset. In most cases, an equipment loan that is not an SBA type is often expected to be repaid in 1 to 5 years. However, the duration can be extended to as long as 10 years if the equipment is very large and if it has a very long shelf life. And although the smallest interest rates and longest payment duration come with SBA equipment loans, it can take much longer to fund, usually between 30 to 0 days, while a typical equipment loan would take 7 days as has already been stated.
What are the qualifications for a business to be granted an equipment loan?
As should be expected there are certain requirements a business has to meet before requesting for equipment financing in the form of a loan. Some of the general requirements a business has to meet include being in business for a good number of years, say, 3 years or more. The business is also expected to have good revenue before it can be offered an equipment loan. Other requirements which might be required by individual lenders shall be discussed.
The first thing a business needs to have in order to qualify for an equipment loan is enough cash to cover the down payment. Most lensing firms will often require a down payment of 5 percent but there are situations in which this figure might increase considerably. For example, the poorer the credit profile of the business the more down payment a bank or some other lender tends to demand as the risks are higher with such businesses. If also the business is a startup much larger down payment might be required, ranging from 10% to as much as 50%, before equipment financing can be obtained. In addition to having the cash to cover the down payment, a business must have a relatively good credit score of at least 550. It has, however, been observed that quite a number of lenders will require a minimum score of 650. That is not to say that financing is not open to businesses with bad credit; rather, what is being said is that such business should expect to be slammed higher interest rates, expect to make higher down payments, and also expect to be offered a shorter repayment term.
Documents Required for Processing an Equipment Loan
As was stated in the beginning, obtaining equipment financing loan is not as cumbersome as one might expect from applying for other commercial bank loans which typically take months to process plus lots of documents to be presented. On the contrary, only such documents as an updated business resume`, business financial statement which helps the creditworthiness of the business, invoice of the equipment for which the loan is required showing soft cost such as installation and delivery, as well as an articulate business plan which shows how the piece of equipment is expected to be of benefit to the business. Some finance providers might request the business tax returns for a period of up to 3 years, profit and loss statement of the business, as well as the balance sheet. Whatever is the case, equipment financing loan cannot be compared with other commercial bank loans in terms of documentation.
Benefits of Equipment Loans
One of the best things about equipment financing which has been stated over and over is that it is easily approved—much like a merchant cash advance. It is also tax deductible because monthly payments used to offset the loan can be recorded as operating expense, in which case a business has to confer with an attorney to ensure that it is not found wanting by the law. Most importantly an equipment loan ensures that liquid cash is available for the business to run smoothly instead of being tied up in a piece of equipment.
Where Can a Business Get an Equipment Loan From?
Of all the options open to a business seeking equipment financing, merchant cash advance is one that should seriously be considered for a number of reasons. First, a merchant cash advance is not exactly a loan per se. It is a lump sum of cash that is given to the business to purchase the equipment which is recovered from the daily credit card sales. Once the invoice of the equipment is presented to the merchant cash advance provider, the amount is factored by say 1.5 to get the total amount the business is to repay. But it is the actual amount of the equipment that is given to the business; this is to enable the merchant cash advance providers to earn some profit. Once the merchant cash agreement has been signed, a fixed portion of the daily credit sales of the business is remitted to the cash provider until the advance has been repaid.
A merchant cash advance by its very nature provides unsecured equipment financing, unlike other lending sources where the equipment itself serves as the collateral. Moreover, a merchant cash advance can be obtained in a matter of few business days provided that the business meets certain minimal requirements. For instance, a cash advance is meant for businesses that process a huge volume of credit sales, generating at least $5000 dollars a month. Meanwhile, the chances of getting a merchant cash advance application are higher than what obtains with bank loans where more than 50% of the loan application by small businesses are turned down. It goes to say that any business that urgently needs an equipment loan will do well to turn to merchant cash advance providers. More and more businesses are embracing the option of merchant cash advance and are benefiting by so doing.
Hardly any business can claim to be capable of meeting all of its financial obligations all of the time. It is normal for a business to seek to finance especially when it is to purchase a large piece of equipment which might have the effect of disrupting cash flow and limiting working capital as a result of its huge cost. Firms must, therefore, learn to utilize the opportunity provided by equipment financing from merchant cash advance providers because of the numerous advantages that come with doing so, either through equipment loans or lease depending on which best suits its needs.