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How Equipment Financing Works for Businesses

By Athena Rebello

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Updated on: Feb 29th, 2024

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7 min read

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Acquiring new equipment may significantly impact a company's cash flow. To expand and meet the increasing demands, businesses can leverage equipment financing. In this article, we will explore equipment financing by checking the eligibility criteria, features, and other details to help you better understand this option

What is Equipment Financing?

Equipment financing is a se­rvice that companies can utilise to ge­t necessary equipme­nt for business operations. Things like manufacturing machine­s, transport vehicles, computers, and office­ furniture can be obtained with e­quipment financing, amongst other equipment.

Features of Equipment Financing 

Before applying for equipment financing, it is important to know whether this type of financial assistance matches your requirements. To help you decide, we have listed the features of equipment financing below:

Loan amount

Every le­nder has a different loan quantity that they can offer. A borrower's previous cre­dit behaviour and the price tag of the­ equipment helps the­ lender dete­rmine the loan's size. It's common for use­d equipment to be finance­d up to 75% of its value. For brand-new equipme­nt, lenders often cove­r up to 90% of the cost. 

Collateral

There is no need for further security because the purchased equipment has been pledged to the lender. But the financial institution may require additional security for larger loans.

Repayment

The loan amount determines the payback duration, which often varies from three to seven years. There is a six-month moratorium in addition.

Interest rate

The majority of equipment loans typically have fixed interest rates, often between 8% and 30%, as well as fixed terms that guarantee consistent monthly payments.

Types of equipment loans

Equipment loans are available in several types to cover different business requirements. Some of the common types of equipment loans are:

Construction equipment 

This type of loan is for construction companies, enabling them to acquire the tools and machines necessary for building projects.

Manufacturing equipment 

Businesses engaged in manufacturing can utilise this loan to purchase the machinery needed for their production processes.

Corporate aviation loans

Individuals in the corporate aviation industry can seek this loan to cover expenses related to airport and in-flight equipment.

Automobiles and allied industries

This financing, which is specifically designed for companies in the automotive sector, helps with a number of tasks, such as producing components and assembling vehicles together.

IT and office equipment 

Businesses operating from offices can access this loan to procure essential tech equipment such as computers, servers, and projectors.

Electronics and  appliances 

Companies requiring electronic gadgets or appliances can benefit from this loan to meet their equipment needs.

Healthcare 

Geared towards healthcare-related businesses, this loan supports the acquisition of equipment and supplies essential for smooth operations.

Eligibility for equipment loans & documents needed

You must be 21 to 65 ye­ars old to apply for equipment loans. The busine­ss needs to have be­en running for the last two or sometime­s even three­ years. The average turnover of the is required to be Rs. 10 Lakh. Apart from this, some of the important documents required for equipment financing include: 

  • Proof of business ownership
  • KYC documents
  • Income tax returns filed during the previous year
  • Balance sheets and profit and loss statements of the previous 2 years

Equipment leasing vs equipment financing

Both the equipment leasing and equipment financing give businesses access to the equipment needed for their operations. However, equipment leasing works as a rental agreement with a lower month-to-month cost. Also, it doesn’t require businesses to pay a down payment.  While as, equipment financing gives the ownership of purchased equipment to the borrower once the loan is paid off. It comes with more month-on-month cost, but overall less payment.

Better alternatives for equipment financing

Equipment loans may not be suitable for every business. There are better alternatives like a term loan that allows you to qualify for favourable rates if your credit score is great. Some other options include SBA loans and lines of credit. Also, based on your business setup, you can choose leasing instead of getting equipment financing.

To sum it up, equipment financing proves beneficial for businesses requiring the acquisition of machinery and other equipment to sustain their operations. It is advisable to thoroughly examine the attributes of this funding option for a comprehensive understanding. Also, several alternatives are available, so explore all the options before making your ultimate choice.

 

Frequently Asked Questions

What is equipment financing?

Equipment financing is a business loan to offer funds for acquiring essential equipment required for business activities without making the entire payment upfront.

What are the key features of equipment financing?

Key features of equipment financing include loan amounts ranging from 75% to 90% of the equipment cost, repayment periods spanning 3 to 7 years with a 6-month moratorium, and typically fixed interest rates varying between 8% and 30%.

About the Author

A Chartered Accountant by profession and a writer by passion, my expertise extends to creating insightful content on topics such as GST, accounts payable, and invoice discounting.. Read more

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