Definitive Guide to Equipment Finance for Business Owners
Small businesses can always benefit from an upgrade to existing equipment or from purchasing the very latest technology or machinery. Even if you can afford to invest significant cash into new assets, you are likely to be left with less capital to finance regular operations and explore new growth opportunities.
However, the reality is that many business owners simply don’t have enough working capital to consider an outright purchase and this is where equipment finance comes handy.
What are the most common types of equipment finance?
In short, vehicle and equipment financing enable you to purchase vehicles, machinery, office equipment and other requirements for your business on either a lease or rental basis. There are several options available for funding your business needs:
A vehicle and equipment loan are the option chosen by most businesses to purchase equipment, and comprises 78 per cent of the business finance market. Throughout the loan, your business owns the asset, and the bank uses it as security, in case you default on your repayments.
An alternative option to an equipment loan is taking out an equipment finance lease, where the bank or lender would own the equipment and rent it to the business for an agreed term at a fixed rental rate. Once the agreed term expires, you have the option to return the equipment, refinance the equipment or purchase it outright.
Opting for a hire purchase loan means the bank or lender owns the equipment and you make repayments on it until the end of the term, when the ownership transfers over to you.
Depending on which loan structure you choose, tax implications may apply, so it’s important to talk to your accountant or financial adviser about any business lending and your specific financial circumstances.
Understanding how your business’ bottom line will be impacted when you take out equipment finance is important; however, this can be difficult if your business is affected by seasonal cash flow fluctuations. Discussing these potential issues with your accountant can be helpful in accommodating cash flow irregularities.
Is an equipment loan or an equipment lease right for me?
Choosing the best way to pay for equipment can depend on the expected productive life of an asset. If the equipment is likely to generate value for a long period, an equipment loan may suit you best.
If you will need an update after a relatively short period of time, leasing equipment might be the better option. This way you avoid having to finish paying off an asset that is now obsolete, which can put stress on cash flow. Use our leasing calculator to find out what your potential repayments are likely to be.
Who is responsible for the equipment during the finance period?
Establish from the outset of the agreement, who is responsible for maintenance, repair and replacement of the equipment during the finance period. If damage or fault occurs, you don’t want to get caught out with unexpected costs.
Are there establishment fees involved?
Establishment fees can easily run into the hundreds, so it is important to be aware if there are any when you are deciding which finance option is right for you.
What happens at the end of the finance period?
Before signing an agreement, it is important you understand what happens at the end of the finance period, as scenarios can vary depending on the finance option you choose. For example, if you are leasing the equipment, once the agreed term expires, you have the option to return the equipment, refinance the equipment or purchase it outright.
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