When planning to set up your business, you’ve wondered how you can get your needed equipment, which is crucial for your business’ success. You’ve searched for ways to acquire capital for it, one which is equipment financing.
You may wonder, how long can you finance equipment and how do you decide if this option is best for you? In this article, we’ll help you with some of the important factors to consider when planning to do equipment financing.
What is equipment financing?
Equipment financing (or asset equipment finance) is an agreement between a borrower and the lender. A borrower can be any business or corporation that needs equipment, while the lender can be a lending institution or a bank. In the written contract, they’re also designated as the debtor and the creditor, respectively.
Under this legally binding agreement or contract, the borrower will be given a loan by the lender to purchase equipment. In return, installment payments over a period – usually for several years – will be paid by the borrower.
Equipment financing can also cover two types of financing: equipment loans and equipment leasing. Equipment leasing has different terms with an equipment finance/loan, although some financial institutions offer these two options.
Industries that are usually reliant on equipment financing are:
- agriculture
- construction
- commercial landscaping
- communication and IT
- forestry and logging
- industrial manufacturing
- mining
This short video can further explain what equipment financing is:
If you’re a business owner in Nova Scotia, you can learn more about equipment financing through any of the Lexpert-ranked best asset equipment finance lawyers in Nova Scotia.
How long do equipment financing plans last?
When you sign up for equipment financing, your lender will give you a disclosure statement and/or a payment schedule, which will provide you with the following details:
- total cost of the loan
- other charges and fees
- months/quarters/years to pay the loan
- specific amount to be paid every month/quarter/year
This document is important since it will give you an idea of how long you can finance the equipment, plus other relevant information. Whether it be an equipment loan or an equipment lease, lenders should give you these details, as required by the provincial or territorial consumer protection laws. This especially applies to banks and other financial institutions, since they’re regulated by the government.
How long you can finance equipment is dependent on this document or disclosure, plus other factors. To better understand this period, we can break it down into three:
Applying for equipment financing
When you’re looking for commercial or heavy equipment, find out how long you must wait before you can get the equipment. This gives you an idea of how soon you can start your operations. It can take anywhere from a week up to a month before you can be approved for equipment financing. The timing depends on your lender.
Term of equipment financing
Equipment financing usually involves long-term contracts whose terms can depend on the contract itself. It’s subject to the consent of both the lender and the borrower, with the lender usually suggesting the term or period through a templated contract. This suggested term or period can be negotiable, depending on how lenient the lender is.
How long your equipment finance contract is can also be based on the following aspects:
- the type of equipment that you want to buy
- your capacity to pay, based on the assessment of your business’ profitability
- your credit score or rating, as set by your lending institution
- the relationship you have with your lending institution
If you have a bad credit score, don’t worry. We have some tips on how you can get equipment financing even if you have bad credit.
Equipment as consideration for the financing’s term
Among these aspects, the equipment is one of the most important considerations regarding how long your equipment finance contract is. Its life span is factored in, where the term would not exceed this life span.
It allows you to own the equipment, during or after the end of the contract, which is still at its prime and is still useful. This is also one of the benefits of equipment finance since you already own it. You can either:
- use the equipment as security for other loans after its term, or
- sell the equipment at the same or higher price for additional capital
Grace period as part of the equipment finance term
Most lenders will allow you a grace period before you start repaying your loan. This is helpful so that you will have enough time to establish your business first and recover some income before you pay your lender.
Usually, this grace period ranges from 6 months to 1 year. Again, this will depend on the type of your equipment; the more expensive the equipment, the longer the grace period is.
Renewal or termination of the equipment financing
Usually, you would have two options after the period that you and your lender agreed, and depending on your equipment finance contract itself:
- renewal: where you will get another loan for a different equipment, either with the same value or for a higher one
- termination: a simple end-of-the-contract term
What are the advantages and risks of longer equipment financing?
There are pros and cons to getting equipment finance over a longer period. Let’s discuss some of these below:
Advantages of a longer period
Equipment finance contracts that have longer periods are attractive to small and emerging businesses, which do not have that immediate access to large capital. It will help them acquire the equipment they need, without stressing over where to get the capital to use for it.
At the same time, the payments that are spread over this longer period are advantageous to businesses. Here, they’ll have more cash flow for other expenses, rather than for loan payments.
Risks on the security
Usually, security will be required by your lender before approving an equipment financing agreement. This security can be upon the equipment to be bought using the loan itself.
Longer equipment financing is usually for larger amounts of equipment financing; thus, you may be imposed with larger security. As such, you must diligently comply with the payment schedule, or lose the equipment that is subject to security.
For more considerations on how long you can finance equipment, consult with the best asset equipment finance/leasing lawyers in Canada as ranked by Lexpert.