What is equipment financing?

Having up-to-date, state-of-the art equipment seems like a luxury. But the reality for most small business owners is that having the right tools to get the job done is essential for success. Navigating financial plans and understanding the different options available is important to get your employees the resources they need. A smart small business owner knows how to utilize multiple funding alternatives to bring in capital from different sources and ease the burden from any one route.

Because of restrictions that come with different financing products, some lending products are better for specific types of purchases. Especially when it comes to equipment purchases, there are a multitude of funding options available for small business owners.

In this article, we are going to discuss equipment financing and the benefits of equipment financing for small business owners. By the end, you’ll have a good idea of how equipment financing works and how it can help your small business.

Equipment Financing: The Basics

Equipment financing is a lending product to support equipment purchases. There are two different equipment financing options: equipment loans and equipment leases.

Overall, the biggest benefit of equipment financing is the extension of payment terms. Rather than making one lump sum payment for new equipment, equipment financing allows you to make payments over time while your business can utilize the equipment.

Equipment financing plans can be used to fund any kind of equipment, furniture, or fixtures. Some businesses don’t necessarily have heavy machinery, but still need equipment around the office – chairs, desks, computers, etc. – equipment financing can be used to fund any equipment that is crucial to day-to-day operations.

Equipment Loans

An equipment loan is basically a term loan, with the restriction that the funds must be used for new or used equipment purchases. You borrow a lump sum of money from a lender to purchase your equipment, making payments to the lender over the terms of the loan.

When you apply for an equipment loan, the equipment itself acts as collateral to secure the money borrowed. This makes equipment loans a viable options for new small business owners, since the emphasis is more on the value of the equipment over time than the credit history of the borrower.

Equipment Leases

Equipment leasing is similar to leasing a personal car. Your small business can lease equipment from an equipment leasing or equipment financing company, which means you basically rent the equipment from the lender while making payments over the terms of the lease. At the end of the lease terms, there are generally three options: end the terms of the lease and return the equipment; extend the terms and keep making payments to use the equipment; or buy out the equipment from the lender. Additionally, there are added tax benefits in that the monthly finance payments are often tax deductible.

Benefits of Equipment Financing

Equipment financing is beneficial for small business owners because it allows businesses to use or own new, updated equipment without the burden of making large purchases outright. Providing your employees with the right equipment directly increases output and efficiency, which ultimately boosts your bottom line.

By using equipment financing to cover equipment expenses, your small business can reserve cash flow. Making lower monthly payments over the terms of your financing plan frees up working capital that can be used in other places. Equipment financing increases efficiency and productivity, takes advantage of tax benefits, and preserves cash. Talk to your financial professional about how equipment financing can work for you.