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What is Equipment Financing? A Layman's Guide for Business Owners

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November 3, 2020

Like most modern companies, your business needs technology to run effectively. But as budgets get tighter, it's becoming harder to afford even essential equipment. Equipment financing allows you to pay for your equipment as you earn revenue, meaning you can start using it right away. This arrangement is managed through an equipment provider and financed by a financial institution. 

How to Finance Equipment for Business

  1. Assess your existing inventory
  2. Discuss financing options with your chosen vendor
  3. Use an equipment finance calculator
  4. Prepare your financial statements and business plan
  5. Finalize the loan details, such as interest rate and monthly payment
  6. Start issuing monthly payments
  7. Continue with ownership or trade-up

With the right partner, financing is easy. Start by assessing your existing inventory and identifying the quantity and type of equipment that you would like to purchase. It's important to note that some providers have a minimum purchase for setting up an equipment loan, so it may be wise to add a couple of extra replacements to the agreement to reach it.

Next, select an equipment provider and discuss financing options. Some providers offer complete flexibility in the rates and terms of your equipment loan. They might also provide the option to finance soft costs, such as installation, freight, and taxes.

To help you consider the terms of the loan, you can use an equipment finance calculator. Drag the bar to see the monthly payments associated with a short term or long term lease and figure out what works for your business. This may be a good time to bring in your CFO or whoever handles your organization's money. You'll also need to get your financial statements in order—more on that below. 

Once you've done your research, checked your financials, and decided on the quantity of equipment to lease, it's time to finalize the paperwork. Your equipment provider will walk you through the specifics and help you sign on the dotted line. During the process, the financial institution may request collateral for the loan. A common option is a lien or the lender's right to claim the loanee's property if a debt goes unpaid.

Now, pay your monthly payments on time until the lease term has ended. Once you have reimbursed the equipment provider for the loan as well as the interest, the equipment is yours. Some equipment partners allow you to either keep your equipment at this time or upgrade with an additional lease. This is an excellent option for those looking to have the newest technology.

Qualifying for an Equipment Loan

Providers and lenders vary with their requirements for equipment loans. Regardless of your business's size, prepare to present your organization's financial statements, including your balance sheet or cash flow statement. If you are a small business owner, you may need to provide more paperwork.

Small business owners should come prepared with a business plan and a detailed proposal for growth. This shows the lender that you will have ample capital with which to pay them back. Depending on your business's size, you may also be asked for your personal credit score and other financial statements. Solid preparation of all these documents will only help your case, and you may consider hiring an accountant to assist with the complexities.

Benefits of Equipment Financing

While the paperwork might be a bear, equipment financing is extremely beneficial for business owners. It allows you to get on your feet quickly and work towards your goals. Not to mention, you can finance a variety of equipment, including multifunction printers, check scanners, and temperature screening devices.

Maintain Cash Flow

Cash flow is essential for small business owners just starting out or hit by unforeseeable events. Purchasing equipment outright can tie up your working capital on equipment. With financing, you can allocate these funds to business expenses, expansion, and more.

Keep Up with Technology

Short-term loans give you the ability to evaluate whether the equipment fits your needs. When your contract expires, you have the option to pursue ownership or trade up to new equipment and continue a loan. With the latter option, you get to enjoy all the benefits of the newest technologies without breaking the bank every time you level up.

Make Smart Business Decisions

While there are many strategies for running a business, a safe one is not to let your business go in the red—or make decisions that could make you end up there. With equipment financing, you're making a smart money decision for your organization to nurture its future.

Once you have developed more capital, you can look into other equipment best practices, such as lifecycle replacement (LCR) plans. Creating an LCR helps you identify how often pieces of equipment in your inventory will need to be replaced and how to budget around these expenses.

Ready to Get Started?

Equipment financing helps you get to work without your finances blocking the way. If you're ready to get started or have questions, feel free to contact our equipment experts.

How to finance equipment