Equipment financing is often a complicated topic. You might have a lot of questions and waiting for the answers can be frustrating.
That’s why we’ve compiled 20 of the most common questions we hear from small business owners about how the equipment financing process works. Hopefully, this will help you understand all the leasing and loan options and benefits available to you. If you still have questions when you’re done reading, please reach out to us. You can use our online contact form to get in touch.
Equipment Financing 101: Answers to Your Most Frequent Questions
1. Why Would I Finance Used Equipment?
Regardless of whether you are buying used or new equipment, financing allows you to keep cash and working capital available for building inventory or managing receivables and payables. Many successful businesses like to follow the “long-term financing for long-term assets” rule. If the equipment you are acquiring has a useful life cycle of three years or greater, then conserve your cash as working capital for short-term business needs and use long-term financing for those long-term assets (like equipment).
RELATED: How Much Working Capital Do I Need for My Business?
2. How Is a Lease Different Than a Loan?
For tax, and accounting purposes, a $1 buyout lease is identical to a loan. You own the equipment, and it depreciates. Team Financial Group simply takes a lien, or security interest, in the piece of equipment as collateral. With a fair market value (FMV), or “true lease,” Team Financial Group owns and depreciates the equipment, and the client can expense the monthly payments for tax purposes.
RELATED: $1 Buyout Lease vs. FMV Lease: What’s the Difference?
3. Are There Any Tax Advantages Associated With Equipment Leasing?
You should consult your tax advisor for details about how the different types of equipment leases may affect your taxes. However, it is important to note that many of the “tax advantages” advertised by various lenders are more a matter of timing when your accountant will be expensing or writing off the equipment. With FMV leases, the expenses are in the lease payment itself.
On the other hand, $1 buyout lease expenses are tied to monthly interest AND depreciation. With depreciation, there is some flexibility with timing, so your tax liability often can be deferred. Again, consult your tax advisor to determine what is best for your company.
RELATED: Get These Tax Benefits With Commercial Equipment Financing
4. Is Collateral Necessary to Obtain a Loan or Lease?
Yes, it is. Your equipment will be used as collateral for your loan. There will be some differences depending on the type of lender (asset-based vs. credit risk, for example), but all will require some sort of collateral for your loan.
5. If I Apply for Financing, How Long Is the Approval Process?
Team Financial Group frequently can approve and fund loans in less than 24 hours. That being said, there are instances when we may need to wait for additional financial information from a customer or equipment information from the vendor and that may require additional time.
6. What Do I Need to Apply for Financing?
If you have been in business for several years, we generally will be looking for a short, one-page application for requests less than $150,000. For larger requests, we might also need copies of your tax return and financial data.
We may be able to take your application over the phone, which only takes arounds 5-10 minutes.
RELATED: What Do I Need to Prepare Before Applying for a Commercial Loan?
7. What Are Your Approval Requirements?
For small businesses, we typically look at the owner’s credit history as the basis for loan approval and financing terms. For larger deals, we may need financial statements or tax returns. However, compared a bank, we have more flexibility and will consider your business’ overall health rather than a single metric.
8. How Will My Interest Rate Be Determined?
Your interest rate will be finalized by your strength of credit (aka credit risk), loan or lease terms, and collateral valuation. Your strength of credit is determined by a combination of factors, including the age of your business, industry, cash flow, credit reports, annual revenue, and—with larger deals—an evaluation of financial statements.
RELATED: 5 Tips to Improve Your Personal Credit Score
9. Are There Any Application Fees?
Only when the deal closes. Typical “Origination/Documentation” fees are $200-$500, depending on the size and complexity of your transaction.
10. Do You Finance Vehicles?
Yes, when used for a commercial application. Below is a more in-depth list of business equipment we’ve financed:
- Manufacturing tools and equipment
- Energy solutions (HVAC, lighting, solar power)
- Construction equipment and heavy machinery
- Servers, software, and other technology
- Transportation and vehicles (trucks, vans, trailers)
- Agricultural and farm equipment
- Office equipment (copiers, printers, office furniture)
- Healthcare equipment
- A wide range of other equipment across many industries
11. Are There Any Requirements Related to Equipment Vendors?
We don’t have any specific requirements, and we work with many different vendors. We employ streamlined, standardized processes when working with our vendor partners, which helps us maximize efficiency. We try to balance this approach by offering as much flexibility as each vendor needs.
RELATED: 5 Reasons to Become a Vendor Partner for Equipment Financing
12. What Can I Do If I Have Bad Credit?
We do our best to approve deals even if your credit is not perfect. Sometimes, additional collateral or a significant down payment can help a deal get done.
That said, we do have to pass on deals at times. Even when that is the case, though, we will provide feedback and guidance to improve your credit so you can secure financing in the future. We want to provide resources and information to customers we haven’t worked with yet so that we can hopefully work with them in the future. We have compiled many of these resources on our blog and we are always open for a conversation.
RELATED: 5 Tips to Improve Your Personal Credit Score
13. What if We Want to Finance More Equipment in the Future?
The longer we have an established relationship and get to know your business, the easier the entire process will be. We strive to make every transaction smooth and easy. On a monthly basis, nearly 50% of our originations are repeat clients because they have found that it saves them time and money to work with Team Financial Group. A simple phone call or email can get things rolling.
When necessary, we can even get deals approved, documented, and closed within only a few hours.
RELATED: Equipment Financing FAQs
14. How Long Should I Finance My Equipment?
We suggest that you finance equipment over its “useful life,” which typically matches the depreciable life of the asset.
15. Do You Have Any Maximum or Minimum Leasing Amounts?
Generally, $5,000 is our minimum and $5,000,000 is our maximum for leasing and loan amounts. However, we have made exceptions.
16. Do You Lease Software or Maintenance?
Yes. However, software and maintenance leases provide no collateral value, so strong business credit is necessary in these situations.
17. Do I Need to Insure the Equipment?
Yes. Team Financial Group needs to be added as a loss payee in case of fire, theft, etc.
18. Can I Pay Off My Account Early?
Yes. Sometimes, paying off a loan or lease is a smart decision, especially if it reduces your debt-to-income ratio or reduces the amount of interest you’ll pay.
RELATED: Should I Pay Off My Equipment Loan Early?
19. What Happens at the End of a Lease?
After the final payment with a $1 buyout lease, Team Financial Group will release any liens on the equipment and you will own it, free and clear.
With a FMV or Fixed Purchase Option lease, you will need to inform Team Financial Group of your intentions 90 days before the end of the lease. This might include equipment purchases, equipment returns, or continuing to rent the equipment on a month-to-month basis.
20. What is a Sale-Leaseback?
A sale-leaseback is a means to acquire capital for your business by using equipment that is owned free and clear.
RELATED: What Is a Sale-Leaseback, and Why Would I Want One?
Contact Team Financial Group to Learn About Fast, Flexible Financing
Still have questions? Let us know. We’ll be happy to work with you to identify and customize business financing solutions that meet your unique needs. Team Financial Group’s commercial equipment financing options can improve your business’ cash flow and overall financial health.
To get fast, flexible financing today, please complete this brief online application.
The content provided here is for informational purposes only. For financial advice, please contact our commercial financing experts.