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.