Equipment financing and your growing business
If you’re an existing business or a new small business and you’re looking at the best way to deal with financials around equipment lending—we have the article for you!
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For many companies, the purchase or leasing of equipment is one of their largest expenses. Not only are these assets extremely critical to business operational stability and driving efficiency but they also regularly need to be upgraded and replaced.
If you’re an existing business or a new small business and you’re looking at the best way to deal with financials around equipment lending—we have the article for you!
In this post, we’ll review the top questions we often get from clients about equipment financing needed to grow their businesses.
What is equipment financing?
What do we mean when we say equipment financing? Simply it’s a type of business loan that is used specifically to purchase or lease equipment for a business. This type of financing can help businesses obtain the equipment they need to operate and grow without having to pay the full cost upfront.
Equipment financing can be secured or unsecured, and the equipment itself typically serves as collateral for the loan. The lender will evaluate the creditworthiness of the borrower, as well as the value and condition of the equipment, before deciding whether to approve the loan and at what interest rate.
Equipment financing can be used for a variety of business equipment, including machinery, vehicles, computers, and office equipment. The terms of the loan can vary depending on the lender and the borrower’s needs, and may include options for leasing, financing, or purchasing the equipment outright.
Is it hard to get equipment financing loans?
The difficulty of obtaining equipment financing loans really depends on several factors, including the borrower’s creditworthiness, the type and value of the equipment being financed, and the lender’s requirements.
If a borrower has good credit and a strong financial history, they may find it easier to obtain equipment financing loans. Lenders will typically look at a borrower’s credit score, debt-to-income ratio, and other financial metrics to determine whether they are a good candidate for a loan.
The type and value of the equipment being financed can also play a role in the difficulty of obtaining financing. Some lenders may be more hesitant to finance certain types of equipment or equipment that is older or has a lower value.
Finally, the lender’s requirements can also impact the difficulty of obtaining equipment financing loans. Some lenders may require a certain amount of collateral or a down payment, while others may have strict documentation requirements or other qualifications.
Overall, the difficulty of obtaining equipment financing loans can vary depending on the borrower’s circumstances and the lender’s requirements. It’s important to research different lenders and their offerings, as well as to understand your own financial situation and creditworthiness before applying for a loan.
Top new equipment purchase considerations to evaluate before buying new equipment
When a business decides to purchase new equipment, there are several important considerations to evaluate. These include:
- Need: The business should evaluate whether the new equipment is necessary for its operations. It should assess whether the new equipment will help it meet its production goals or provide a competitive advantage.
- Cost: The business should consider the total cost of the new equipment, including purchase price, installation, training, and maintenance costs. It should also evaluate the financial impact of the purchase on its cash flow and budget.
- Quality and Reliability: The business should evaluate the quality and reliability of the equipment. It should research the reputation of the manufacturer and read reviews from other users.
- Compatibility: The business should evaluate whether the new equipment is compatible with its existing equipment and systems. It should also consider the ease of integration and any potential downtime during the installation process.
- Safety and Compliance: The business should evaluate whether the new equipment meets safety and compliance standards. It should also assess the risk of any potential hazards associated with the equipment.
- Warranty and Support: The business should evaluate the warranty and support provided by the manufacturer. It should consider the duration of the warranty, what it covers, and the manufacturer’s reputation for providing customer support.
- Sustainability: The business should evaluate the environmental impact of the new equipment. It should consider whether the equipment is energy-efficient, uses eco-friendly materials, and is recyclable.
By considering these factors, a business can make an informed decision about purchasing new equipment that will benefit its operations and contribute to its long-term success.
Ok, so you’ve decided that you NEED new equipment. Congratulations that is usually a sign the business is growing.
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Should I use equipment financing or simply a term loan?
The choice between equipment financing and a term loan will depend on your specific needs and financial situation. Here are some factors to consider:
Equipment financing is typically easier to obtain than a term loan because the equipment itself serves as collateral. If you have less-than-perfect credit or a new business with limited financial history, equipment financing may be a better option.
Equipment financing may have more favourable terms than a term loan, including lower interest rates and longer repayment periods. This is because the lender has the equipment as collateral, which reduces their risk.
If you only need to purchase equipment, equipment financing may be a better choice because it is specifically designed for this purpose. A term loan may be a better option if you have other business expenses that you need to cover.
Equipment financing may offer tax benefits, such as depreciation and interest deductions, that may not be available with a term loan.
In summary, equipment financing can be a good option if you need to purchase equipment and want favorable terms, while a term loan may be a better choice if you have multiple business expenses or need to borrow a larger amount of money.
It’s important to evaluate your options carefully and consult with a financial advisor before making a decision.
Are interest rates better on equipment financing loans compared to a term loans?
Interest rates on equipment financing loans may be better than on a term loan because the equipment itself serves as collateral for the loan. This reduces the lender’s risk, which may result in lower interest rates for the borrower.
However, the interest rates on equipment financing loans and term loans can vary depending on factors such as the borrower’s credit score, the amount of the loan, the repayment term, and the lender’s policies.
In general, equipment financing loans may have lower interest rates and longer repayment terms than unsecured term loans. This is because the equipment serves as collateral and reduces the lender’s risk.
It’s important to compare interest rates and terms from different lenders before making a decision to ensure that you are getting the best deal for your specific needs.
Benefits of buying vs. leasing business equipment
When it comes to acquiring equipment for your business, there are two primary options: buying or leasing. Both options have their advantages and disadvantages, and the best choice depends on your business needs, financial situation, and goals. Here are some benefits of buying vs. leasing business equipment:
Benefits of buying business equipment:
- Ownership: When you buy equipment, you own it outright, which means you can use it for as long as you want without having to return it to a leasing company.
- Long-term cost savings: Over time, owning equipment can be more cost-effective than leasing because you don’t have to pay interest on a lease or worry about lease renewal fees.
- Tax benefits: Purchased equipment is eligible for depreciation deductions, which can reduce your taxable income.
- More control: When you own equipment, you have more control over its maintenance, repair, and replacement. You can also modify it to suit your business needs.
Benefits of leasing business equipment:
- Lower upfront costs: Leasing usually requires less money upfront than buying equipment. This can be a significant benefit if you’re just starting out or if you have limited cash flow.
- Flexibility: Leasing allows you to upgrade to newer equipment more frequently, which can help keep your business competitive and efficient.
- Maintenance and repairs: Most leasing contracts include maintenance and repair services, which can save you time and money.
- Tax benefits: Lease payments are generally considered a business expense and can be deducted from your taxable income.
In summary, buying business equipment may be more cost-effective in the long run, while leasing can provide more flexibility and lower upfront costs.
Ultimately, the choice between buying or leasing equipment depends on your specific business needs and financial situation.
Most common industries that use equipment financing for capital purchases
Many industries use equipment financing to acquire the capital they need to purchase necessary equipment.
Some of the industries that most commonly use equipment financing include:
- Construction: Construction companies often require expensive heavy equipment, such as bulldozers, excavators, and cranes, which can be costly to purchase outright.
- Manufacturing: Manufacturing businesses require specialized equipment, such as machinery, conveyor belts, and assembly lines, to produce goods efficiently and effectively.
- Healthcare: Medical practices, hospitals, and other healthcare facilities require expensive equipment, such as MRI machines, X-ray machines, and ultrasound machines, to diagnose and treat patients.
- Agriculture: Farmers and ranchers require specialized equipment, such as tractors, plows, and irrigation systems, to plant and harvest crops and care for livestock.
- Transportation: Trucking companies and other transportation businesses require expensive equipment, such as tractor-trailers, buses, and aircraft, to transport goods and people.
- Technology: Technology companies require expensive equipment, such as servers, computers, and specialized software, to develop and maintain their products and services.
- Hospitality: Hotels, restaurants, and other hospitality businesses require equipment, such as kitchen appliances, laundry machines, and furnishings, to provide quality service to their customers.
These are just a few examples of industries that commonly use equipment financing to acquire the capital they need to purchase necessary equipment. However, any business that requires equipment to operate efficiently and effectively may benefit from equipment financing.
What tax incentives does the CRA offer for interest on equipment loans?
The Canada Revenue Agency (CRA) offers several tax incentives for businesses that pay interest on loans.
Here are some of the most common tax incentives:
- Interest expense deduction: Businesses can deduct the interest expense they pay on loans used for business purposes from their taxable income. This deduction can reduce a business’s overall tax liability.
- Capital cost allowance (CCA): The CRA allows businesses to claim CCA on certain types of equipment and other capital assets. The CCA is a depreciation expense that can be deducted from the business’s taxable income over time. This deduction can help businesses recover the cost of acquiring capital assets and reduce their overall tax liability.
- Scientific Research and Experimental Development (SR&ED) Tax Incentive Program: This program provides tax incentives to businesses that conduct scientific research and experimental development in Canada. The program offers tax credits, which can be used to offset a business’s income tax liability.
- Small business deduction: Businesses that qualify as small business corporations (SBC) can claim a deduction on the first $500,000 of active business income. This deduction can reduce the business’s overall tax liability.
It’s important to note that the rules and regulations around tax incentives for interest on loans can be complex, and businesses should consult with a qualified tax professional to ensure they are taking advantage of all available tax incentives.
What is the average size of an equipment financing loan in Canada?
The size of an equipment financing loan in Canada can vary widely depending on the type of equipment being financed and the specific needs of the business. However, according to a survey conducted by the Canadian Finance and Leasing Association (CFLA), the average size of an equipment financing loan in Canada is approximately $160,000.
It’s important to note that this figure is only an average and that equipment financing loans can range from a few thousand dollars to millions of dollars depending on the needs of the business.
Factors that can affect the size of an equipment financing loan include the type and cost of the equipment being financed, the creditworthiness of the borrower, and the terms of the financing agreement.
Overall, equipment financing is a common and important method for businesses in Canada to acquire the capital they need to purchase necessary equipment and remain competitive in their industries.
What is the average length of an equipment financing loan in Canada?
The length of an equipment financing loan in Canada can vary depending on the type of equipment being financed, the financial situation of the borrower, and the terms of the loan agreement. However, the typical length of an equipment financing loan in Canada is between three to seven years.
Equipment financing loans are often structured with repayment terms that match the expected lifespan of the equipment being financed. For example, if the equipment being financed has an expected lifespan of five years, the financing term may be set at five years to match the useful life of the equipment. This helps to ensure that the borrower is not still paying off the loan long after the equipment has become obsolete or is no longer in use.
The length of the financing term can also affect the interest rate and monthly payments on the loan. Generally, longer financing terms may result in lower monthly payments but higher total interest costs over the life of the loan.
It’s important to note that the length of an equipment financing loan can be negotiable, and businesses should work with their lenders to find a financing solution that best meets their needs and financial situation.
Common equipment financing terms in Canada
The terms of an equipment financing loan in Canada can vary depending on the lender, the borrower’s creditworthiness, and the specifics of the loan agreement. However, some common terms of equipment financing loans in Canada include:
- Loan amount: The loan amount for an equipment financing loan can vary widely depending on the cost of the equipment being financed and the financial situation of the borrower. Generally, lenders will finance up to 100% of the cost of the equipment.
- Interest rate: The interest rate on an equipment financing loan can vary depending on the lender, the borrower’s creditworthiness, and the specifics of the loan agreement. Interest rates can be fixed or variable, and can range from 5% to 25%.
- Repayment term: The repayment term for an equipment financing loan can range from one to ten years, with the average term being between three to seven years. The repayment term is often structured to match the expected useful life of the equipment being financed.
- Payment frequency: Payments for an equipment financing loan can be structured to be made monthly, quarterly, or annually, depending on the borrower’s preferences and cash flow.
- Security or collateral: Equipment financing loans are often secured by the equipment being financed, which serves as collateral for the loan. In some cases, lenders may also require additional collateral, such as real estate or other assets.
- Early repayment penalties: Some equipment financing loans may include penalties for early repayment, which can discourage borrowers from paying off the loan before the end of the loan term.
These are some of the common terms of an equipment financing loan in Canada, but it’s important to note that the specifics of each loan can vary depending on the lender and borrower’s needs.
What happens if you default on equipment financing loans?
If you default on an equipment financing loan in Canada, the lender can take legal action to recover the amount owed.
Here are some of the potential consequences of defaulting on an equipment financing loan:
- Default notice: The lender will typically send a notice of default to the borrower, informing them that they have failed to make a payment or have otherwise breached the loan agreement. The notice will outline the steps the borrower can take to rectify the default and may also include a deadline for doing so.
- Repossession: If the borrower fails to rectify the default within the specified timeframe, the lender may have the right to repossess the equipment being financed. The lender can then sell the equipment to recover the amount owed on the loan.
- Legal action: If the proceeds from the sale of the equipment are not enough to cover the outstanding balance on the loan, the lender can take legal action to recover the remaining amount owed. This can include obtaining a court judgment against the borrower, garnishing wages, or placing a lien on other assets owned by the borrower.
- Damage to credit score: Defaulting on an equipment financing loan can have a negative impact on the borrower’s credit score, making it harder to obtain credit in the future.
It’s important to note that some equipment financing loans may include provisions for restructuring or renegotiating the loan agreement in the event of default.
Borrowers who are having trouble making their payments should contact their lender as soon as possible to explore their options and avoid defaulting on the loans. Perhaps refinancing your equipment loan is an option you can review to update payment terms or inquire about interest rate savings.
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It’s common to refinance equipment loans
Yes, it is common for businesses to refinance their equipment loans. Refinancing an equipment loan can help borrowers lower their monthly payments, reduce their interest rates, or extend their loan term, among other potential benefits.
Refinancing an equipment loan involves obtaining a new loan with better terms and using the proceeds to pay off the existing loan. This can help borrowers save money over the life of the loan, reduce their monthly payments, or obtain better loan terms.
It is important to note that refinancing may not be the best option for everyone, and borrowers should carefully consider the costs and benefits of refinancing before deciding to proceed. It may also be helpful to consult with a financial advisor or loan specialist to determine the best course of action.
How does refinancing an equipment loan work?
Businesses can refinance equipment loans in a similar way to how they refinance other types of loans. Here are the steps a business can take to refinance an equipment loan:
- Determine the existing equipment loan terms: The business should gather information about the terms of the existing equipment loan, including the interest rate, repayment schedule, and any fees.
- Evaluate the business’s current financial situation: The business should review its current financial situation, including its cash flow, revenue, and credit score, to determine if it is in a position to refinance the equipment loan.
- Research lenders: The business should research potential lenders that offer equipment loan refinancing. This may include traditional banks, credit unions, online lenders, and equipment financing companies.
- Compare loan terms: The business should compare the interest rates, repayment terms, fees, and other terms offered by different lenders to determine the best option.
- Apply for a loan: Once the business has identified a lender, it should apply for a loan. The lender may require financial statements, tax returns, and other documentation to assess the business’s creditworthiness.
- Close the new loan: If approved, the business will need to close the new loan and use the funds to pay off the existing equipment loan.
It’s important to note that refinancing an equipment loan may require a new appraisal of the equipment, which could affect the loan amount and terms. Additionally, the business may need to provide proof of insurance and adhere to other requirements specified by the lender.
Buying new equipment for your business can be equally stressful and exciting for all the reasons listed above. Levr.ai can help take the pain out of finding the RIGHT financing optional for your business to get what it needs fast, and keeps your business growing.
Now that you have a better understanding of the ins and outs of equipment financing, it’s important to review all your options. If you have experience applying for a business loan (really any kind of business loan) you will already know the work involved can be time-consuming.
Levr.ai is designed to make this process easier, faster, and more straightforward. A safe and secure platform allows you to collaborate with the key members of your team i.e. accounting, financial planner, and business operators to organize all the required financial statements and necessary business forecasts, plans, and documents. Having everything in one place makes it easier to apply with multiple lenders to secure the rates and loan repayment terms that are best for your business.
In addition to making the process of getting a loan better, Levr.ai’s free loans marketplace allows you to review options and compare offers from multiple lenders based on what is right for you and what allows you to achieve your growth goals.
Using the data you provide in your profile in tandem with our team’s financial industry experience—Levr.ai provides the data intelligence to customize options to review that are best to consider.
Levr.ai also can negotiate exclusive loan rates with its expert team of certified financial advisors and loan industry partnerships.
Businesses should also consider other options such as merchant cash advance (MCA), accounts receivable (A/R) financing, venture debt financing, or SRED financing along with equipment financing before making a final decision.
To learn more about Levr.ai and business term loan options in the free loans marketplace, create a free account today.
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