While starting up or expanding a business, you might face different financial issues as a business owner. As you might understand, you can never predict the financial costs. As a result, you will need money to purchase bigger office space, hire new staff, and for other purposes. To manage these without hindrance, you should take out an equipment financing loan. This type of funding enables you to buy new equipment or machinery to operate your business successfully.
If you have just begun your start-up business, an equipment loan can be your ideal choice because start-ups often require multiple pieces of equipment in place before even getting off the ground. Buying that equipment needs a lot of money. That is why if you opt for this type of loan, you can avoid massive financial strain.
The Meaning of Equipment Loan
Equipment loan refers to a funding type utilized to purchase equipment for businesses. You need to repay the loan over a fixed term, and after you have successfully repaid the entire loan with applicable interest, you can either take possession of that equipment or have the option to purchase them.
Types of Equipment Loan
There are different equipment loans to explore, and they all work differently. But basically, there are four types of equipment financing out there. They are as follows-
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Finance Lease
In this type of equipment loan, the lender of asset finance loan purchases the equipment on your behalf and leases them to your business. After that, you can rent the equipment from the lender and make timely repayments. At the end of the lease, the lender will return the equipment to you, or you can buy them for an agreed price.
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Operating Lease
An operating lease is another equipment loan type and is similar to a finance lease. But the only difference is that you cannot take ownership of the equipment once the lease end.
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Consumer Hire Purchase
In this type of equipment loan, the lender of asset finance loan purchases the equipment and hires them to your business. Though the equipment is not owned by you during the lease, you can go for the ownership in the end.
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Chattel Mortgage
A chattel mortgage enables borrowers to own equipment and pay it off over time. The lender of 2nd mortgage loan essentially has a mortgage over the equipment, taking hold of them if you, by chance default the loan.
How Exactly Does Equipment Loan Works?
Before you plan to take out an equipment financing loan, you should learn a bit about how it works. As you have learned, each equipment loan type functions differently. For example, for equipment that will become outdated in a short period, like computers where software is constantly updating, an operating lease is a beneficial option for borrowers. It works differently because if you approach a lender of 2nd mortgage loan, you will not get the alternative to buy the equipment as it goes back to the lender once the lease period is over. On the contrary, when you take a finance lease in the form of an equipment loan, you can buy the equipment outright, and as a result, you can also get ownership of it.
But it does not mean there are no common links between each equipment loan type. Each option offers you the choice to take hold of the equipment and use them for your business. In each of these loans, as a borrower, you can utilize the equipment as security and choose to pay the lender of the asset finance loan over time rather than purchasing the equipment outright.
How To Get An Equipment Loan?
To obtain an equipment loan, you should look for the best lender. It will help you get the best offers with flexible terms and reduced interest rates. Once you have searched for the most suitable lender, you should verify whether you meet the lender’s eligibility criteria. Apart from this, you should keep all the required documents before applying for a loan. After that, you need to submit the loan application, and if everything is fine and verified, you will get the loan approval from the lender within 24 hours or two days.
Benefits of Equipment Loan
Equipment loans come with countless benefits. Some of these are as follows.
- By taking out this loan, you can get up to 100% of finance for new machinery or equipment from the lender.
- You will encounter a hassle-free loan application procedure if you choose the right lender.
- You will get flexible loan amounts and terms, and if you select the most suitable lender, you will also get the loan at a much more affordable interest rate.
- An equipment loan also offers flexible repayment tenures depending on the borrower’s convenience.
You can get tax benefits by taking this kind of loan.
Final Thoughts
By reading the above article, you can more or less understand the working process of equipment loans. Many borrowers often think it is wise to take out a 2nd mortgage loan for equipment purchases as a solution if you do not want to purchase equipment outright when looking for new machinery for your business.