One of the most common reasons any small business will apply for some kind of loan is to finance the purchase of equipment necessary for conducting business. This might be a bulldozer or a dump truck, or it might be office equipment like computers. In any case, financing the equipment will generally call for obtaining a business loan or leasing the equipment from a company that retains ownership of the equipment.
How It Works
Equipment financing involves obtaining a loan or lease so that physical assets can be purchased for your business. The main thing to remember about equipment financing is that it always involves paying for a physical asset somehow. The reason that’s important is that the physical asset serves as collateral in the transaction since the lender would have the right to seize the equipment if the borrower defaults on the loan. Given the fact that this built-in collateral exists, it’s a more secure transaction for the lender and is for that reason generally more easily obtainable than other types of business loans.
Loans vs Leases
Loans are very useful for business owners who require specific pieces of equipment to conduct their business, but who lack the funds to purchase that equipment outright. In such cases, lenders will generally agree to provide the capital so that the equipment can be purchased, and the borrower would then agree to make monthly installment payments so as to repay the loan.
Of course, that means you will generally end up paying more for the equipment in the long run than it would have cost you to make an on-the-spot purchase, and you’ll generally only be able to obtain between 80% and 90% of the cost. That means you will be responsible for the other 10% to 20% of the purchase price.
In a leasing arrangement, you still get the use of the equipment, but you never actually buy it yourself. You’ll still end up making monthly installment payments to the equipment owner, but you never take on the responsibilities of ownership. This means you’re not responsible for maintenance of the equipment, and if it should become obsolete during the leasing period, you’re not stuck with it at the end of that time. When the lease period expires, you’ll have the option of renewing the lease, buying the equipment, or walking away from it altogether.
Looking to finance an equipment purchase?
Sometimes obtaining a critical piece of equipment is all that’s necessary to send your business to the next level. Contact us at Coastal Commercial Lending so we can consider some options with you for making your equipment purchase.