When it comes to getting a business off the ground and expanding into new markets, it is very hard to predict the financial costs that will crop up along the way. From needing bigger office space, more staff members, or group team building days, there are so many different reasons to take out finance to help you get ahead.
One of these in particular is equipment financing, which allows you to purchase new equipment to help processes run more smoothly. In an ideal world, the money starts coming in straight away and your business is able to invest in all the right equipment. However, start-ups often need this equipment in place before even getting off the ground, which can add a huge financial strain. This may leave you wondering just how equipment financing works.
What Is Equipment Financing?
Equipment financing essentially refers to a loan that is used to purchase equipment for your business. These periodic payments are made over a fixed term, and once you pay off the total of the loan, the equipment is either owned by you, goes back to the lender, or you have the option to purchase it. There are different types of equipment finance to explore, and they all operate in different ways.
Exploring how equipment financing works, often depends on the type of financing you choose, which we look at below. One of the most common types of equipment financing is a Chattel Mortgage. When it comes to taking out this type of loan, the piece of equipment (or set), it put up as collateral against your loan. This has the benefit of securing you a better interest rate and lowering costs over time.
Types of equipment that can be financed include:
- Restaurant oven
- Manufacturing and industrial equipment
- Energy equipment
- Medical equipment
Types Of Equipment Financing
There are four main types of equipment financing on offer. Each one differs in the way the loan is offered and in whether or not you own the piece of equipment, or the lender does. These are:
- Finance lease: in this instance the lender buys the equipment and leases it to your business. You can rent it from them and make payments over a period of time. At the end of the lease, the equipment is returned, or you can purchase it for an agreed price.
- Operating lease: with an operating lease, the asset is owned by the lender, just like above, and rented to your business. However, in this agreement, there is no option for your business to take ownership of the equipment at the end of the lease.
- Chattel Mortgage: this option allows you to own a piece of equipment straight away and pay it off over time. The lender essentially has a mortgage over the equipment, taking possession of it if you default on payment.
- Consumer Hire Purchase: with this type of loan, the lender buys the equipment and hires it out to your business. While the equipment is not owned by you during the term of the loan, you often take ownership at the end.
How Equipment Financing Works
Still wondering how equipment financing works? Depending on what loan you choose to take out, the equipment finance you choose to take out will work differently. It’s important to look at the different options available to you and work out the best one for your business needs. Often, for equipment that will become obsolete in a short space of time, such as computers where software is constantly updating, an operating lease is the best option.
This is where you don’t have the option to purchase the equipment at the end and it goes back to the lender. On the other hand, when you have equipment that is integral to your business, such as a restaurant oven, it is worth considering buying it outright so you take ownership straight away.
Of course, when it comes to how equipment financing works, there are some common links between them. Each product gives you the option to take possession of the necessary equipment straight away and putting it into use in your business. In each of these loans, you are using the piece of equipment as security for the loan and choosing to pay the lender over time instead of buying the equipment outright. Having the right equipment can make all the difference to the success of your business, so it’s important to have this in place.
Choosing An Equipment Finance Loan For Your Business
If you’re not sure which of the four equipment financing loans would work best for your business, then it is worth seeking professional help. The team at ALC Commercial can look at your individual circumstances and give expert advice when it comes to taking out an equipment financing loan. There are so many options available to you it is about finding the right one to help your business both grow and succeed.