Equipment finance refers to a loan that a business seeks to purchase equipment essential to it. This equipment acts as the collateral for the loan which means that the business owner has permission to continue to use the equipment as long as he repays the loan, or else the finance company may repossess the equipment. Businesses that use one form of physical equipment or the other can apply for equipment finance, including ovens, dishwashers, food processors, grills, computers, cash registers, etc.
Equipment finance is not limited to any business. Hence, big-scale enterprises and small-scale enterprises may seek equipment finance for the purchase of necessary equipment. However, with a small-scale business, the owner has to decide if it is worth it to seek equipment finance rather than making an outright purchase where the equipment needed is on a small scale like a single cash register.
Equipment finance might come in two ways, either by obtaining a loan to purchase equipment or by leasing the equipment. Whether to seek a loan for an outright purchase of the equipment or to rent the equipment depends on the type of equipment being purchased.
Equipment finance helps start-ups obtain equipment that is important to the business to begin operations that they cannot purchase. Equipment finance also aids businesses in purchasing equipment that is quite pricey and which it may not be capable of affording, or where the business owner does not wish to dip into personal funds, or where the business owner does not want to restrict cash flow of the business by purchasing equipment he can get through equipment finance or where the company is the type where there are constant changes in technology and ensures the business stay ahead of the competition, there is the need to obtain new equipment.
Equipment finance is offered by the bulk of financiers that offer finance options for other things. Also, your typical financial institutions may provide equipment finance.
Benefits of Equipment Finance
Increase in Working Capital
When a business owner opts for equipment finance to purchase equipment instead of using funds from the business to secure an outright purchase, it allows the company to free up its working capital allowing it to have the cash flow required for other pursuits that may help the business grow.
Equipment finance allows a business to keep up with the latest technological advancement in their field. It provides them with an edge over their competitors by allowing them to have the most recent equipment with all its advancement and different effects, giving them that something extra and allowing them to be efficient while retaining their cash security.
In equipment finance, the borrower makes payments which are usually monthly to the lender. With each payment he makes, there is an interest paid. This interest paid may be regarded as tax deductibles.
Securing equipment finance from a financier opens up other avenues of securing loans for the business other than equipment purchase. The equipment acts as collateral for the equipment finance, which means that other properties owned by the company may be security for obtaining another loan from another financier.
Easy Application Process
Unlike securing loans from our typical financial institutions like banks, it is quite easy to secure a loan for equipment finance. The application process is easy and does not require all the formalities that your typical financial institutions will request. In equipment finance, the value of the equipment is taken into consideration to see if, in case of default in payments, the financier is capable of making his money back if the equipment is sold. They also look at the business’s creditworthiness and if the company is of good standing in the community. The borrower’s credit is also taken into consideration.
The ability to purchase recent equipment gives a company a competitive edge over its competitors in that same type of business. A good dose of healthy rivalry allows for the growth of the business.
Types of Equipment Finance
A business owner must know about the different types of equipment available to him before choosing the type that best suits his need.
This sort of finance agreement is when a borrower obtains money from a lender to purchase a chattel. This chattel usually the equipment purchased stands in as security for the loan, and when the borrower defaults in payment, the lender has the option of repossessing the equipment. In a chattel mortgage, ownership of the equipment is transferred to the borrower upon acquiring the equipment.
Commercial Hire Purchase
This sort of equipment finance is when the lender acquires the equipment that the business needs and allows the lender to hire the equipment while paying monthly installments for a fixed period. In commercial hire purchase, the lender retains ownership of the equipment until the borrower completes the installment payment, then ownership is transferred to the borrower.
Equipment Lease and Rental
With this type of equipment finance, the financier purchased the equipment, and the borrower leases the equipment from the financier. As with other equipment finance, the borrower pays the financier monthly within a particular timeframe. The business owner or the borrower may return the equipment or decide to continue the rental, or he may choose to acquire the equipment from the lender. An equipment lease is suitable for businesses that do not require regular use of the equipment or a business that always needs the newer model equipment. However, with equipment rental, the agreement is monthly. Parties may vary the terms of the contracts to it at the end of the month. Still, the person making the variation must give notice before the agreement’s variations can become effective.
Fully Maintained Equipment Lease
In this type of equipment finance, the financier purchases the equipment and funding the operation cost and leases the equipment out for a fixed period for an installment while retaining ownership of it. The equipment is returned to the financier when the lease term is up.
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