What's equipment financing and why is it useful?
Equipment financing helps you access essential business equipment when you don't have the cash to buy it outright. In this guide, you'll learn all about equipment finance and why it could help your business grow.
How does equipment financing work?
Equipment financing includes a range of approaches, including loans and leases, to secure essential equipment, ranging from tools and machinery to office furniture and computers, for your business. If you choose to use debt financing, your loan will generally be secured against the equipment you buy, so if you don't repay the loan, the lender can repossess the equipment.
Why is equipment financing useful for businesses?
Equipment finance lets you obtain equipment when you need it rather than waiting until you've got the cash on hand. You can use it to operate your business, expand your offering or upgrade your technology to stay competitive at any point. It'll also spread the cost of the asset over a period of time, smoothing your cash flow.
Types of equipment finance
There are four main types of equipment finance:
Equipment loan (also known as a chattel mortgage)
With a commercial chattel mortgage, you get a loan for the full cost of the asset with no deposit required. You legally own the equipment you buy, but the lender has a security interest in it. That means the equipment is collateral on the loan, and the lender may repossess it if you default on repayments.
Under a finance lease, you don't own the equipment but pay a regular fee for the right to use it during a lease period. Depending on your lease agreement, you may have the option to buy the equipment outright at the end of the lease period.
Commercial hire purchase
Commercial hire purchase is very similar to a finance lease, but you own the item at the end of the term of the agreement. You hire and make regular payments over the agreed term. The leaser owns the equipment during the hire period, but you take ownership once you make the final payment.
Cash flow funding
You can use cash flow financing to buy equipment. Instead of securing the loan against the equipment, you're borrowing against the cash you expect to come in.
What can you buy with equipment financing?
Whatever equipment you need to operate, upgrade or expand your business may be bought with equipment financing. However, there are three common categories.
Equipment financing is used to buy vehicles essential to your business, like trucks, vans and cars.
Farm equipment and machinery
Farming equipment and machinery include tractors, quad bikes and other vehicles, along with balers, combines, ploughs, mowers, planters, sprayers and more.
Tools and computers
You can also use equipment financing to access smaller items — perhaps you need new office computers and equipment or a new set of tools for the workshop.
What are the benefits of equipment financing?
Equipment financing comes with three main benefits:
Employ new and up-to-date technology
If you need the latest technology and newest equipment to stay competitive, you can access it sooner.
Help maintain your business capital
Financing equipment over time, rather than paying for it outright and upfront, means you keep your cash to invest elsewhere.
Fuel growth in your business
You can get the equipment you need when you need it without tying up significant amounts of cash. This gives you more options and opportunities to grow your business.
What are the disadvantages of equipment financing?
Equipment financing also comes with some drawbacks:
Higher lending cost
Because you generally pay establishment fees and interest on an equipment loan, you could pay more for the equipment than if you bought it outright. You may also need to make a down payment, which can tie up cash.
Loan can outlast the life of the equipment
Equipment can quickly become outdated or worn out, or may be damaged by accident. This means you may have to continue repaying the loan on equipment that you no longer use.
Equipment financing vs leasing
Leasing is a form of equipment financing. With a lease, you essentially pay to rent equipment for a time — you don't own the equipment, and in some cases, you won't have to repair, maintain or upgrade it. A lease can be a great option if you need the equipment for a short time, don't have the cash for a large down payment, or want more flexibility than you have when buying assets.
Equipment financing FAQs
Do equipment financing loans have high interest rates?
Interest rates depend on the lender, the amount you borrow and your credit rating.
Is an equipment financing loan secured or unsecured?
Equipment financing loans are generally secured against the equipment you buy. If you stop repaying the loan, the lender can sell the equipment to recover losses.
Is it better to finance equipment with a loan or a lease?
Financing your equipment through a loan or a lease are both good options, depending on your business needs and goals. In general, leasing is useful if you need the equipment for a short time, don’t have the cash for a large down payment or want the flexibility to regularly update or change your equipment. With an equipment loan, you own the equipment, so once you pay off the debt, you can use it as collateral for other loans or sell it on.
Why do some companies prefer to lease rather than purchase equipment?
Some companies prefer to lease rather than purchase equipment to avoid making large down payments and being stuck with outdated equipment. In many cases, the leaser will also be responsible for the maintenance and repairs of the equipment.
Grow with the equipment you need
Equipment financing means you don’t have to wait if you need new equipment to operate or expand your business but don’t have the capacity to buy it outright. It lets you spread the costs over a longer period, minimising cash flow problems. Like all lending, equipment financing has downsides, so it’s important to research your options, understand your business goals, and monitor your financial position.
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Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.