What is Equipment Financing?
Earning cash in this uncertain economy is getting harder day by day- Most of the time, even the fulfillment of personal needs is a challenge. In such an era, to earn huge amounts of cash by two hands for a business is more than just a challenge; it is trial on man’s sanity and mostly people resort to dishonest ways of earning a livelihood. To avoid such dire and pitiful circumstances, the theory of financing’ was invented.
The concept of financing has branched out into many categories. But the basic meaning behind each category is the notion of providing assistance in the form of loans or lease to particular party or individual. Equipment financing has progressed with the same connotation.
Ways to Get Equipment Financing
Financing for equipment can be attained by a loan or by lease. A loan is not usually considered adequate, when it comes to equipment as a down payment for the first two years has to be paid; and with the interests, the loan repayments become quite extensive. Due to this, equipment financing is generally considered through means of leasing.
Leases on equipment have two basic types:
- Operational Lease: an operational Lease is the lease in which all the responsibilities of the leased asset are with the lessor. The lessee uses the equipment for a number of years until he has a need, and then returns it. In Operational Lease, the ownership of the equipment is with the Lessor.
- Financial Lease: A financial lease is the lease in which the responsibility of the equipment is with the lessee. The life of the lease agreement usually stretches over the economic life of the equipment/asset itself. The agreement also has a clause that states the ownership of the equipment will be transferred to the lessee when the term ends.
Other sub-types of financial lease used for equipment financing include, capital lease, direct sale lease agreement, Leveraged lease, open-end lease.
Equipment Financing Types
The category of equipment financing has been divided in two paths:
- Commercial Equipment Financing: This type of Equipment Financing is offered to profit earning organization or new businesses/ individuals that are in need of equipment to run their business but cannot afford it. The agreement and the premium payments are set to accommodate the business cash flow.
- Tax-Exempt Equipment Financing: this type of Equipment Financing is extended to non-profit organizations such as charities, schools and government entities.
Both the commercial and noncommercial institutes have a varied need for a large number of assets. Sometimes the equipment includes basic necessities such as cars and motors while sometimes the necessity extends to huge pieces of machinery that are required for manufacturing purposes.
For this, Equipment Financing has been further sub-categorized into sectors for which equipment can be availed:
- Manufacturing Finance: Finance for engineering machines, plastic molding machinery, steel making and wood work machines; such technologies that are used to manufacture goods.
- Health Finance: Includes finance for equipment such as expensive MRI machines, scanners, ultra sound machines, dental machines and surgical machines.
- General equipment finance: Financing in this category includes providing equipment such as drilling machines, food processing, mining, packaging and recycling machines.
- Motor Vehicle Finance: the Finance for motor vehicles such as cars, trucks, buses, coaches.
- Infrastructure and Cities Finance: Concrete pumping, earthmoving, trenching, quarry and road making machinery – equipment financing is available under this section.
Benefits of Equipment Financing
The merits of equipment financing are numerous. Not only is equipment financing the perfect way to help with the start-up costs of business, in fact it is the perfect antidote of tied up cash. Not having to give a huge down payment in a lease agreement, allows the business to stay afloat and use the required equipment to begin the business.
Paying premiums or loan repayments, keeps the cash flow of the business mobile. It gives the business an opportunity to proceed with hiring people to use the equipment.
Equipment financing allows the business to mitigate its risk factor by not having to spend a huge amount of cash, and still use the asset. It also acts as hedge against inflation as small amounts are able to average out the inflation factor.
The assets attained through equipment finance, deliver the opportunity to gain latest technology, easy transfer and disposal of assets.
Equipment Finance Can Be Availed
Equipment Finance can be availed through Banks (commercial or investing), Financing companies, Leasing Companies and even asset management companies.