Acquiring equipment is one of the main reasons for taking out a business loan. If the equipment is directly related to delivering the product, it will inevitably pay for itself. Business loans are frequently used to buy computers and other equipment that help to keep business operations running smoothly. Here are a few things to know about equipment financing.
Understanding Equipment Financing
Many businesses improve their operations by upgrading equipment, which can be accomplished with a loan or lease to purchase. Equipment financing occurs when a company borrows money to invest in hard assets for their business. For example, equipment financing can include borrowing money to buy company vehicles as well as industry-specific tools.
To qualify for equipment financing, you’ll need a good credit score of 600 or above. With equipment loans, the equipment becomes collateral if the borrower is not able to make payments. This type of loan is convenient for business owners who are unable to pay upfront for supplies. The downside to this borrowing strategy is that the amount of interest will raise the expense substantially.
Another option available for business owners is equipment leasing. With this option, businesses can use equipment without having to pay substantial upfront costs. Essentially you are paying a fee to use the equipment while the lessor maintains ownership. It’s advantageous to lease equipment if you need to upgrade constantly. Some lessors offer options to purchase the equipment at the end of a license agreement term.
The two main types of leases are capital and operating. While a capital lease is a long-term financing option toward ownership of equipment, an operating lease is more like a rental agreement in which equipment will be returned at the end of the term. Both types of leases come in various forms.
A Fair Market Value (FMV) Lease allows you to make regular payments while using the equipment for a specific term. At the end of the term, you have the option of returning the equipment or buying it based on its fair market value. Another option is a $1 Buyout Lease in which you pay off equipment costs throughout a lease period and eventually owe $1, then own the equipment.
Additionally, a 10 Percent Option Lease is similar to a $1 lease except you get the option of purchasing the equipment for ten percent of its costs. This type of arrangement often involves making lower monthly payments than with the $1 buyout lease.
No matter what option you choose, equipment financing is an excellent option if you can’t pay for business tools up front.