What you need to know about equipment loans

Equipment loans are an important financial tool that allows businesses to acquire the necessary machinery and tools without straining their cash flow. These loans are designed to be flexible and tailored to meet the specific needs of the borrower. Here are some key features of equipment loans:

Loan Amount

The loan amount for equipment financing can vary widely, typically covering 75% to 100% of the equipment’s purchase price. The exact amount depends on several factors, including the cost of the equipment and the borrower’s credit history. 

Lenders work closely with borrowers to tailor the loan amount to their specific needs, ensuring that businesses can acquire the essential equipment necessary for their operations without compromising their financial stability. This tailored approach means that businesses, whether small or large, can secure the financing they need to continue growing and evolving.

Security/Collateral

One of the most appealing aspects of equipment loans is that the equipment itself serves as collateral. This asset-based security eliminates the need for additional collateral, simplifying the approval process for borrowers. 

For lenders, this also reduces the risk involved, as the equipment can be repossessed and sold if the borrower defaults on the loan. This makes equipment loans more accessible to a wider range of businesses, including those that may not have substantial assets to offer as collateral for traditional loans.

Annual Revenue

Lenders often prefer to work with businesses that are GST-registered, especially if the value of the equipment is high. This ensures that the borrower has a stable and consistent revenue stream, which is crucial for meeting repayment obligations. 

For higher-value assets, lenders may require the business to have been GST registered for a longer period. This requirement helps mitigate the risk for lenders and ensures that the borrower is capable of managing the financial responsibility that comes with taking on an equipment loan.

Repayment Terms

Repayment terms for equipment loans can range from one to seven years, depending on the equipment’s lifespan and the borrower’s preferences. Longer repayment tenures often result in lower monthly payments, providing businesses with greater flexibility in managing their finances. 

This flexibility is especially beneficial for small businesses, which may need to manage cash flow carefully to cover other operational expenses while repaying the loan. By aligning the repayment schedule with the expected useful life of the equipment, businesses can ensure that they are not burdened with high monthly payments that could impact their overall financial health.

Interest Rates

Interest rates on equipment loans can vary significantly based on factors such as the borrower’s credit history, business performance, and the loan term. While competitive interest rates are often available, they play a crucial role in determining the overall cost of financing. 

Borrowers with strong credit histories and solid track records can potentially secure lower interest rates, reducing the total cost of the loan. While businesses with less established credit histories may face higher rates, which can increase the overall cost of the equipment. 

The best place to start is by speaking to a finance broker who can compare your options and help find the right solution for your business.

*This information is general in nature and does not take into consideration your individual circumstances. Please contact us for further information.