For most businesses, equipment finance is the main form of capital financing as it provides businesses with the money they need to buy the necessary equipment they need. Some businesses may use equipment finance to buy computers and software, while others may use this finance to purchase tools and equipment for employees to work on their jobs. Equipment finance helps the lender by lowering the interest rate the borrower has to pay, thereby reducing the risk involved in providing such funding.
Equipment finance is not a term used frequently, but when a business uses equipment finance to pay for items it needs, it is termed equipment financing. One advantage equipment financing has over other forms of financing is that it gives a business cash flow sooner than other forms. Cash flow is a positive indicator of profitability. Thus, cash flow allows a business to plan for future expenses in advance, which is difficult to do when a business is simply starting. Cash flow also allows a business to make purchases based on cash on hand rather than relying on future credit availability.
Most businesses rent equipment, which means they have to take out equipment finance, either from the bank or another lender, to lease the necessary items. When equipment rental payments are made, the finance is repaid from the profits made on the sales of the rental items. However, businesses can also obtain equipment finance without taking out a loan. Many businesses who are just starting may do this, in which case they will probably find it easier to get equipment finance from a friend or other business entity, or they may have contacts in the business world that provide such financing.
In equipment finance, a business can lease equipment either for short or long periods. If a business takes out a long-term lease structure, it pays monthly payments during the lease’s lifetime and is then required to return the equipment at the end of the lease. If a business leases equipment for a shorter period of time, it can usually pay off the initial cost with some sort of financing arrangement over a longer period of time, but the leasing company will own the equipment at the end of the lease period.
Businesses should understand equipment financing options because their success can depend on them. For instance, some equipment financing options may allow businesses to keep the total cost of the equipment they lease as their down payment. The down payment will then be applied towards the total cost of the equipment at the end of the lease term. This type of equipment financing is good if a business needs equipment immediately because they can pay the down payment and then start using it right away. This option is good for those businesses that need to build up inventory quickly.
Businesses can also arrange equipment finance to pay their suppliers on an installment basis. The company would repay the amount every month until the total amount is repaid. However, companies that do not have a steady cash flow might not afford to pay the monthly installments all at once. They may choose to make some smaller payments over time until they have paid off all of the suppliers. In this case, the suppliers may be willing to negotiate their repayments down to a convenient level.
Some equipment financing options require a lessor to maintain good credit history with the lender. This means that the lessor must have a low credit score. The lessor would then use this fact to get a better interest rate. However, this does mean that the equipment will be more expensive than businesses with a good credit history. If the lessor defaults on its payments, the lending institution could sell the equipment directly to another buyer.
Equipment finance lease offers several tax benefits. The lease payments are eligible for federal tax breaks, and the equipment is also eligible for state tax breaks. Business owners may save money on their IRS taxes by using the equipment for their own use. These tax benefits can significantly reduce the amount that business owners owe in taxes.