Equipment financing is a way that businesses can get new equipment without having to pay a large amount upfront. It works like a rental agreement where businesses choose the length of the loan and make a monthly repayment. These types of loans are often flexible and offer competitive interest rates which can provide a lifeline to small businesses who can’t afford to purchase expensive equipment outright. Things like vehicles, machinery, tools, and office furniture are all items that can be purchased through this financing method.
If you’re considering equipment financing for your business, but want a bit more information, read on.
What is equipment financing and how does it work?
According to Prospa, “Equipment finance is a loan type many businesses use to purchase new equipment or update capital assets. This type of finance is often secured against the value of the asset you are intending to purchase, in much the same way a car loan or a home mortgage works.”
These loans help small businesses who may be struggling financially, or not in a position to buy equipment upfront.
Inovayt Finance Broker, Nick Ball, adds to this saying, “Equipment financing is using the asset – whether that be machinery or a vehicle – as security for financing, rather than using the businesses capital savings.”
It is also a great way to manage cash flow, accelerate productivity and replace ageing equipment and technology. Like renting, businesses set up a loan period that coincides with monthly repayments. At the end of this lease, you can then choose to either give the equipment back, continue renting or buy it outright from the financier at fair market value.
Equipment loans are a great option for businesses who need to update their appliances or vehicles – especially those businesses who will start turning more profit once they have the appropriate tools to do so. Equipment loans can reach as high as $5 million dollars with interest rates as low as 7.5 per cent. However, businesses can’t use this money for anything – it must be used for equipment. If you don’t pay off your loan within the dedicated period, the lender will ask for the loaned equipment back immediately.
The team at Inovayt offers their insight into this field by explaining, “Rather than applying for a traditional business loan, which can take longer to secure and generally requires property security, small business owners have been turning to asset finance. Asset financing enables businesses to acquire large assets, usually through hire or lease, without the need to make an outright purchase.”
Financing equipment is also a great way for businesses to minimise cash flow problems. One way this can be achieved is by lowering monthly payments and making a larger payment (called a balloon payment) at the end of the lease period. If businesses choose this option, they’ll pay lower monthly instalments, however, they will pay a bigger interest rate as well as the balloon payment at the end of the loan.
Inovayt have a dedicated team that can help those who are looking for equipment financing.
Nick says, “Inovayt are able to help as we have access to a number of different providers. Everyone has their own policies, products and procedures for equipment financing, so where we add value is identifying the best fit.”
What types of equipment can it be used for?
When it comes to equipment financing, there is a range of equipment options available to you. These include:
- Work vehicles
- Trades tools
- Office computers
- Heavy machinery
- Farming equipment
- Industrial washers
- Commercial ovens
- Medical equipment
- And more
Many of these things can come at a hefty price, especially for smaller businesses where outright purchases of expensive items aren’t feasible. Often, the purchase of these items has the potential to impact sales in a positive way. This equipment means businesses can perform their job to the best of their ability, therefore, potentially bringing in more cash flow.
Nick breaks this down further by elaborating on the three types of equipment categories – primary assets, secondary assets, and tertiary assets.
“Primary assets are things like cars, trucks or things with a motor. Secondary assets are agricultural implements or something that doesn’t necessarily have a motor but is still quite a large asset. Tertiary assets are hospitality equipment like ovens and other appliances which aren’t as large, but still aren’t easy things to purchase,” he says.
Are there any criteria you need to meet to be eligible for equipment financing?
Most lenders will have some form of criteria you need to meet to be eligible for an equipment financing loan. To take out one of these loans, Commbank outlines their criteria as:
- You need to be 18 years or older
- You must be eligible to work in Australia
- You must be an individual, sole trader, sole owner of your company or someone authorised to apply for finance and credit for a business
- The equipment for which you are seeking financing equipment must be used by a business (mostly or entirely for business purposes)
- The business needs to have been trading longer than 12 months
- The business must have a good credit rating and isn’t going through the process of bankruptcy
Nick advises, “ABN history and time in business is really important. There are options out there for start-up businesses, but there are probably fewer. At Inovayt, we can identify at what point in the business lifecycle a company is at and if there are options out there.”
He also recommends, “Equipment financing is available to those that aren’t necessarily a business entity but use their vehicle for predominantly business purposes. The likes of workers – such as real estate agents – who do a lot of driving.”
Equipment financing is a great way for businesses to purchase the equipment they need to run their business without having to pay the full cost of the item upfront. The interest rate is generally lower than that of a personal loan which makes it an appealing opportunity for small businesses who may be struggling to pay upfront. If you’re looking for a way to leverage your business, talk to one of our team members to discuss how equipment financing can benefit you.