Regularly, businesses are faced with numerous financing decisions. They have to avail finances to fund the daily operations of the firm as well as its capital components. Money requirement for all these purposes may be raised by different means. It can be through loans, ploughing back profits, issuing shares if it’s a listed company, among other means at the disposal of a firm. However, the particular mean of financing chosen has its own unique features that a borrower has to take into consideration before making a viable decision.
Top among the business loans available today is equipment financing. It is turning into the most viable option for small, medium and even large business enterprises. Firm’s regard it due to ease in availability and flexible terms and conditions attached to equipment financing.
How Equipment Financing Works
Equipment Financing entails loan to purchase business equipment. It covers physical business asset ranging from office tools like printers, computers, office desks among others to high value equipment like machines, vehicles etc. Under this model of financing, a firm seeks for an equipment loan or lease to acquire physical equipment. To obtain it, the borrower pays some down payment and commits to pay the rest in installments. However, this will vary from one equipment lender to the other.
For equipment leasing, the borrower uses an asset for an agreed amount of time and pays some fees for usage. After the elapse of the agreed period, the owner of the equipment takes it back. On the other hand, equipment loan entails obtaining an asset from the lender and uses the asset as you pay. After the payment of the last installment, the borrower now takes ownership of the asset.
For both instance, the asset acts as the collateral for the loan. If the borrower fails to pay for the equipment or honor terms of the contract, lender recoups the asset. If the asset is recovered, the lender also retains the amount paid as installment.
Special features of equipment financing
Equipment financing does not require full payment for the product. Whether its equipment loan or leasing, no lender will ask for the full amount for the asset. In most instances of equipment leasing, even a down payment is not necessary. The terms of payment are also subject to negotiation. This way, businesses can acquire and use assets without straining its finances. Firm’s books of account are fairly amortized; they do not suffer a one-time payment for an asset.
They do not require a security. In this form of financing, the physical asset in question acts as the collateral for the loan. In case of default, only the asset will be re-possessed back by the lender. This way, the firm in an equipment financing deal does not risk the seizure of its assets in case they fail to pay the respective dues.
Minimal Cost. Despite it being a loan scheme, equipment financing deals are often cheaper compared to other plans such as hire purchase. The overall price of equipment is cheap, in fact, most equipment lender apply a relatively lower interest rate to the equipment cash value.