What is Commercial Equipment Financing?
Commercial Equipment Financing is an Asset-Based Financing product funded mostly by private lenders and non-bank-lenders to corporations to secure any Commercial or Industrial Equipment. This product works best for businesses that need Equipment but do not have the capital on hand to buy it outright or they do not want to deplete their cash reserves for Equipment and rather retain the capital they have on hand.
What are the top 3 reasons why businesses normally acquire New Equipment
Companies need to replace broken down or obsolete machines over time. This can lead to increases in productivity, capability, and efficiency.
Companies that are either expecting growth, have already experienced steady business growth, or planning that their recent growth will continue.
Companies may obtain new equipment to accommodate a specific customer, work on a new project or to change/add to their current products/services.
Bottomline adding Commercial or Industrial Equipment can be a great decision for the company, to have the assets on hand that can produce as needed for the business.
What are the two Main Commercial Equipment Financing?
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What is Equipment Leasing?
Equipment leasing is an asset based financing product which allows a business to gain access to a piece of equipment without buying it outright. Equipment leases are usually available through manufacturers, dealers, banks, and non-bank lenders. Equipment Leasing offers advantages that owning equipment does not, including lower monthly payments, which are typically spread out over the course of months or years rather than delivered in a lump sum. Additionally, many equipment leases also include service agreements or service add-ons. Which can help businesses negate some of the cost for in-house technicians to service their equipment.
A Bank or a non-bank lender provides the funding for an Equipment Lease that grants the business access to needed Equipment without having to buy it outright. There are two main types of Equipment Leases available on the marketplace.
What is a Capital Lease?
A capital lease is any lease that allows a company to acquire a piece of equipment with fixed monthly payments over a multi year period. This type of lease comes with balloon payment at the end of the term that serves as a bargain purchase agreement that transfers ownership of the equipment to the business owner.
This type of Equipment Lease is best for companies that want to end up maintaining a piece of equipment yet want to avoid a major cash outlay up front. There are three different ways to end the term of a Capital Lease. A Fair Market Value Lease (FMV): the monthly payments are low, but the cost of buying the equipment at the end of the term may be high.
A $1 buyout lease: the monthly payments are higher as they spread the cost of the equipment out over the length of the term, leaving the final payment to acquire the asset down to $1. 10 Percent and Option Lease: The monthly payments spread over the term with the majority of the cost of the product is built into the lease, which typically leads to lower interest rates. At the end of the term the business ends up paying around 10 percent of the equipment’s cost to acquire the asset. Considering the major differences between the three options of how to end the term of a capital lease it is best to decide which option will be best for the business prior to securing a capital lease.
A capital lease is a rental contract in which the business receives all benefits and drawbacks of owning the equipment. For example, Capital Leases generally exceeding one year have certain tax implications. The industry standard accounting rules state that the lessee (the business) accounts for a leased asset (the equipment) as though it has been purchased. The business (lessee) records the leased (asset) as an item of property, plant, and equipment, which is then depreciated over its useful life to the business (lessee).
The business (lessee) must also record a liability reflecting the obligation to make continuing payments under the lease agreement, similar to the accounting for a note payable.
What is an Operating Lease?
An operating lease provides the business with temporary use of the Equipment, with no transfer of ownership at the end. An operating lease is typically used when financing equipment with a short shelf-life, or equipment that you plan to replace frequently or at the end of the lease. This type of Equipment Lease is best for companies that need to constantly update their equipment. An operating lease is a rental contract in which your business does not receive the benefits of ownership. The lease payments are simply recorded as a rent expense as incurred and the underlying asset (equipment) is not reported on the books of the business (lessee).
With either asset based financing option the businesses can make regular payments in exchange for the use of the Equipment. Which allows companies either the ability to acquire equipment without having the capital on hand to purchase it outright or the ability to divest their capital into other pressing areas of their business, instead of tying up a ton of capital into a piece of equipment.
- Equipment Leasing allows businesses the ability to hold on to their working capital for day-to-day business expenses, business expansions or unexpected business-related expenses.
- This product provides up to 100% of the capital needed to acquire an asset, often including sales tax, shipping and installation costs.
- In addition to saving their working capital in their war chest, Equipment Leases, provide the business with a fixed monthly expense that can be budgeted effectively.
- This product allows companies to stay on the cutting edge of their industries by constantly being able to obtain the latest equipment at the end of a lease term.
- Equipment Leasing can benefit businesses that only need to keep a piece of equipment for the short term, instead of buying it and trying to resell it once it’s no longer needed.
- This asset-based financing product offers businesses potential tax benefits. In many cases, Equipment Leasing can provide the company with a full deduction of lease payments against current earnings.
- The business owners must have a minimum credit score (650 plus on average)
- The company must have a minimum of six months time in business
- Type and size of the lease
- Length of the lease
- How well Equipment holds value
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What are Equipment Financing Loans?
An Equipment Financing Loan option is funded by a bank or non-bank lender to purchase equipment. Most equipment financing loans typically will not cover the entire cost for the asset, most lenders require a down payment. This will typically run between 10 – 20 percent of the total cost of the asset.
Considering the lengthy underwriting process involved with reviewing the business and the asset being purchased, as is the case with most long-term loans, expect that obtaining an equipment financing loan can be a time-consuming process.
The major difference between equipment financing loans and other loans is that the equipment itself serves as collateral. Therefore, if the business can’t make the payments, the lender will simply repossess the equipment. Please be advised that some lenders will also file a blanket lien on the asset and maybe even the business during the term of the loan. Once the loan is paid off, the equipment’s ownership converts to the business for either continued use, to rent out to other businesses, or to sell the asset.
The asset will remain on the company’s balance sheet. Equipment Financing Loans generally offer businesses a tax savings under Section 179 which is a tax incentive for businesses. This is meant to provide a benefit that is designed to help businesses purchase equipment and invest in business development. Section 179 allows the company to treat qualifying assets as business expenses and expense the costs of those assets immediately. Please consult with your tax professional to make certain that your business will be able to meet several qualifications to receive Section 179 benefits.
Businesses ranging from a main street single location to Fortune 100 companies have benefited from financing their equipment and retaining their cash flow reserves to advance other aspects of their company.
- Companies that utilize Equipment Financing Loans are able to constantly add the necessary assets required to keep the businesses running.
- This asset based financing product can be a great source of alternative business funding that does not tie up or reduce lines of credit, in order to add the equipment needed to operate the business.
- Equipment Financing Loans lenders can work with businesses to customize a solution that is specific to each company’s unique budget.
- If a company meets the qualifications and has their documents in order then the application process for this product can be quick and easy.
- Equipment Financing Loans allows companies to stay on the cutting edge of industry trends and technological advancements within their industry. With this product providing the capital needed to obtain the latest equipment necessary to meet a businesses goals.
- This product provides financing for Up to 80% of the assets cost minus the 20% down payment by the business acquiring the equipment.
- The ability to balance a standard monthly payment like a typical term loan.
- With an Equipment Financing Loan the business will own the equipment, so changes and alterations if necessary can be made without permission from the lender. Also the company is in charge of maintenance, so if issues arise the company addresses it immediately, without waiting to make certain the problems get fixed.
- Once the term of this asset based product is finished the business has the option to sell the equipment, allowing it to recover some of the costs.
- Equipment Financing Loans provide the capital to obtain a physical asset, meaning unlike unsecured loans the asset that is being purchased serves as collateral. This is why this asset based financing product tends to be a more cost-effective and lower-risk way to acquire Equipment than other forms of financing.
- This asset based financing product works best for Equipment with long-term utility items that don’t typically depreciate quickly.
- It is also beneficial to companies that can afford a 20% down payment and companies that don’t need the equipment right away that can go through an application and underwriting process.
Each lender will vary in their requirements to obtain an Equipment Financing Loan. The following are just some of the general qualifications most lenders will look at when making an underwriting decision. Since underwriting standards vary per lender please verify if your business will have all of the items in place to ensure you meet their minimum requirements.
Most lenders may require that a company have at least two years in business with minimum annual revenues of over $300,000.
In order to qualify for Equipment Financing Loans business owners must have on average a minimum credit score (625-plus on average).
In addition to credit score, most lenders may require a business plan that breaks down the company’s detailed future growth proposal. The most pertinent items that the majority of prospective lenders will desire to see on a business plan include but are not limited to a comprehensive business summary. Documents proving the company’s time in business. Business revenue statements as well as one to two years of full annual financial statements including the profit and loss and balance sheets. This comprehensive plan is intended to help lenders assess the financial strength of a business and to identify the revenue and the expenses that are coming into and going out of the business. In order to determine upfront as best as possible a business’s ability to be able to manage the Equipment Financing Loan.
Please be advised that since some lenders may also be interested in the personal finances of the owners of a business, then keep a personal financial statement on hand in case it is requested.
The company must also showcase that it has the down payment on hand typically around 20% or sometimes more.
In order to close out an Equipment Financing Loan an official quote from a vendor will be required.
Troy Business Groupis ready to provide your business with access to the best Equipment Leasing and Equipment Financing Loan solutions that could speed up your company's cash flow.
In closing, Companies that require equipment to operate know that owning or having access to the right pieces of equipment is a crucial part of running and expanding their business. Successful companies know from experience that having good equipment can be the difference maker between landing big contracts and losing big money. Obtaining new equipment is always a big investment for many businesses, especially true for companies that compete in the professional services industry which is highly dependent on having reliable, up-to-date equipment to succeed at serving their customers.
Everyone knows that cash is king and if a company can retain their cash on hand to redirect into other pressing areas of the business. They will be in a better position to win vs companies that have to deplete their cash-flow to add equipment assets to the business. If a company needs to acquire equipment to fulfill a short term use or it needs to constantly update their equipment time to time in order to stay on the cutting edge, without depleting their capital reserves then an Equipment Leasing may be best for that best.
On the other hand if the business has long term uses for a piece of equipment and needs to own it via a loan then an Equipment Financing Loan would probably be their best option. Regardless of the option that a business needs, our team here at Troy Business Groupis ready to provide your business with access to the best Equipment Leasing and Equipment Financing Loan solutions that could speed up your company’s cash flow. Please apply online, email us for an appointment, or call us today. Our team is committed to helping your business grow with Equipment Leasing and Equipment Financing Loans and will guide you through the process each step of the way.