In the world of equipment financing, there is basically loans and leases for financing options.
Leases are of course provided by leasing companies but they are also provided by some bank and financial institutions.
Equipment loans are provided primarily by banks and credit unions and private lending organizations.
Like any time of financing, the lower cost equipment loans are going to be provided by major banks.
For amounts under $500,000, banks will try to direct the lending request into their small business loan program that provides the banks with partial loan guarantee against loss by the federal government. These are term loans that can run up to 7 years in length with interest rates starting at prime plus three. While used equipment can be financed through the small business programs, the majority of financing granted is for new equipment.
When the amounts are larger, institutional lenders will consider equipment financing as a standalone loan product where the loan is in the form of a demand loan or term loan.
Demand loans are most common with the major banks as they allow the bank to call the loan at any time for any reason, providing the lender with broader means to reduce risk.
Term loans can also be provided by banks, or bank subsidiaries that have a focus on term loan and mortgage lending.
Credit unions also can be an excellent source of equipment loans, but will typically be priced sightly higher than what you may be able to get at a bank. The key here is access to funds. Cheaper money is not much good if you cannot secure it in the time you have to work with so if a credit union provides easier access is a shorter amount of time, any added cost may be worth it.
For any institutional lender that provides equipment loans, the loan to value ration is typically about 75% meaning that the equipment loan amount will not exceed 75% of the value of the asset.
As the lending risk increases, there are also equipment loans provided by private lenders or asset based lenders.
The cost of borrowing will be higher from an asset based lender, but once again the cost of financing is relative to the risk to the lender. Asset based lenders will provide higher risk loans due to the fact that are more specialized with respect to lending against assets and know how to liquidate security to get their money back in the event of default.
Asset based lenders typically are directly or indirectly associated with liquidators which provides a greater ability to manage risk.
In many cases, the very same liquidators are hired by banks and other institutional lenders to liquidate a bank’s security interest when default occurs.
Because there can be more work to go into the due diligence surrounding an asset based equipment loan, this type of lender will tend to have minimum deal sizes of $250,000 to $500,000.
They will also lend against forced liquidation value in most cases where banks and institutional lenders will lend against fair market value of the equipment involved.
Equipment lease financing has a greater focus on small business financing requests due largely to the fact that this is a largely under serviced market from an equipment loan point of view.
If you have a financing requirement under $250,000 it can be difficult to be qualified through a government sponsored small business loan program, causing equipment leasing to be the best option in a lot of cases.
So basically there are a number of different equipment loan options which can vary according to the type of equipment, deal size, time in business, financial and credit profile, geography and so on.
This is why it makes a great deal of sense to work with an equipment financing specialist in order to more quickly zero in on relevant sources of equipment financing that can actually fund your requirements in the time you have to work with.
Equipment Loans continue to be a strong financing option for both new and used equipment for more established businesses with good credit or small businesses that qualify for government supported loan programs.
In Canada, for instance, the small business financing program sponsored by the federal government, can provide financing on equipment of up to $250,000 for qualifying businesses.
In general, outside of government support programs, equipment loan programs are more focused on what we’ll call stronger than average borrower credit profiles as compared to leasing companies which collectively cover off a lot broader range of credit and lending risk with respect to equipment based assets.
The key reason for stronger borrower requirements among lenders is due to the fact that the financing company does not own the underlying asset and will be more challenged to realize on its security in the event that the borrower does not meet all the conditions of financing.
Equipment loans are secured by the underlying asset, but the credit decisions are also largely based on the overall financial stability of the business, existing credit rating, and strength of ownership.
For businesses that have solid credit, equipment financing through debt instruments can provide for some of the lowest financing costs available. This is due to the fact that the providers or equipment loans are traditional banks and other lending institutions that have access to very low cost capital. If you qualify for their equipment lending programs, you can receive great effective interest rates.
Leasing companies can also provide similar implicit borrowing costs, but it will also depend on their source of financing. The majority of leasing companies do not have similar sources of financing, so their best offering will not likely be able to beat a bank rate.
At the same time, leasing companies cater to a much broader spectrum of credit than equipment lenders. For credit that is not well developed or strained in any way, equipment leasing options can be the best fit.
The key here is what the business is eligible for. If you can qualify for an equipment loan, its definitely something to consider due to the potential lower cost of financing.
While equipment debt financing will not always be the best deal, it will provide you with other options to consider.