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 financing sources can be categorized in a number of different ways.
First, the actual type of financing facility available to finance equipment is either a loan or a lease. For an equipment loan, the actual piece of equipment is owned by the business and is financed by a loan provided by an institutional lender that is also the responsibility of the equipment owner.
In the case of an equipment lease, the actual piece of equipment is owned by the leasing company who in turn provides the business with a lease and the right to use the asset. Leases can be written as either operating leases and capital leases, each with their own specific requirements and conditions that can also vary from one country tax jurisdiction to another.
Equipment financing is further categories by equipment type and industry application. Through specialization, lenders have a better idea of the resale value of the their underlying security in the event they have to take a collection action against a borrower or lessee in default.
The last major type of categorization is connected to the credit profile of the borrower. Providers of equipment loans, for instance, tend to only focus on low risk lending scenarios where borrower credit is considered to be good to excellent.
The credit spectrum can be categorized from AA to C levels of credit. For each type of credit, there are borrowers that will focus on that level of credit risk and will charge a cost of financing that is in keeping with the level of credit where lower levels or credit get charged higher costs of borrowing.
The Canadian equipment financing sources primarily include banks, credit unions, and leasing companies. Depending on the area and related industry, there can be a very diverse group of lending sources for equipment. At the same time, for remote areas, the number of available sources will likely be less as many providers of equipment financing function on a regional basis only.
While there are many sources to consider, not all providers have their own retail services, relying on equipment financing brokers to bring and administer their products in the market place.
In these cases, the only way to get access to certain lender programs will through an equipment financing broker.
A good broker will not only provide you with greater access to capital sources, but can greatly assist you by only focusing on relevant lenders and helping you properly structure your equipment financing application.
Like anything else, there are good brokers and those with little to no experience. Securing the services of a broker that is more of an equipment financing specialist can definitely save you both time and money.
If you have any questions regarding equipment financing, please give use a call and we’ll make sure all your questions get answered.