A Business Owner’s Dictionary for Commercial Equipment Financing
Want a crash course in commercial equipment financing terms? We’ve got you covered. We’ve put together a dictionary of common equipment financing terms every business owner should know.
If you’re interested in commercial equipment financing and struggling to understand the jargon you find online, keep reading or fill out our easy online application with your questions. Enjoy!
$1 Buyout Lease: Allows you to own equipment while making monthly payments instead of paying the entire cost up front. At the end of the lease, you make a nominal payment (often just a dollar) to end the financing period and permanently transfer ownership.
Accounts Payable: The amount of money your business owes (current liability).
Accounts Receivable: The amount of money your business is owed by others. The unpaid balance is reported as part of the current assets listed on your company’s balance sheet.
Amortized Loan: Requires you to make periodic payments until you have paid off both the principal balance and interest. Early payments typically contain a larger amount of interest payoff, while later payments contain larger payoffs toward the principal balance.
APR: Annual percentage rate. The price you pay to borrow money, quoted as the percentage of the financing amount that you’ll pay each year. Example: If you borrow $100 with an APR of 10%, you would pay $10 per year in financing costs.
Business Credit Score: Indicates the creditworthiness of your business. Credit bureaus rate your business’ credit on a scale of 0 to 100.
Cash Flow Statement: A statement showing all the money entering and leaving your business via income, expenses, and loan payments.
Collateral: Property that a lender accepts as security for financing. The lender gets to keep the collateral if you are unable or unwilling to pay off your debt.
Debt Service Coverage Ratio: (DSC) The amount of cash flow you have available to pay your current debt obligations.
Depreciable Assets: Assets for which you can expense a portion of their cost on your taxes each year that you use them.
Equipment Financing Agreement: (EFA) A non-traditional loan in which you own the equipment and the amount of interest you pay over the life of the loan remains fixed (also called a capital lease).
Equipment Leasing: Rental agreements for the use of equipment. You do not own the equipment, and payments are generally fixed (also called an operating lease).
Fair Market Value Lease: (FMV) Allows you to use the equipment for a set period. Includes several options at the end of your lease term, including purchasing equipment at its current fair market value.
Five Cs of Credit: Describes the five primary factors (character, capacity, capital, collateral, conditions) lenders use to evaluate whether they can approve a financing request from a potential client.
Fixed Interest Rate: An interest rate that remains the same throughout the entire financing term.
Independent Lenders: A lender not affiliated with a financial institution or bank. They can often provide additional financing options, sometimes faster and with more flexibility.
Insolvency: The state of being unable to pay back a debt.
Interest Rate: The percent of a loan’s or lease’s outstanding principal that the lender charges each period for the use of their money or asset.
Lien: A lender’s claim to take possession of collateral property. The lien lasts until you have paid off your debt.
Long-Term Debt: Debt that will take longer than one year to pay off.
Loan-to-Value Ratio: (LTV) The percentage of a piece of equipment’s value that a loan will cover. For commercial equipment financing, this ratio is typically 100%.
Maturity: The final state of a loan, when you have completely paid off both the principal and interest of your loan.
Non-Amortized Loan: A loan with fixed interest and no fixed payment schedule. Instead, you pay off the principal balance in a lump-sum payment.
Principal: The original balance of your loan or lease, excluding interest and fees.
Private-Party Sale: A transaction that involves purchasing from an individual owner (private party) rather than a vendor or dealer.
Refinancing: Taking on a new debt to pay off an old one.
Risk Assessment: The likelihood of you being unable to pay back a debt. Used by lenders to determine whether to accept a financing request and how to set the interest rate.
Section 179 Benefits: A tax incentive that allows you to treat qualifying assets as business expenditures and expense the costs of those assets immediately.
Secured Loan: A loan that requires collateral in case you don’t pay back the debt.
Short-Term Debt: Any debt that you will pay back within a year.
Sole Proprietorship: An unincorporated business with a single owner who pays personal income tax on any profits.
Step Payment Plans: Financing options that allow you to pay back more in the beginning and less each period (step-down) or less in the beginning and more each period (step-up) to account for unique cash flows and needs.
Term: The period of time during which you will make payments on a loan or lease.
Traditional Loan: You borrow money to purchase equipment and make periodic payments that include principal and interest over a fixed term. Once the loan is paid in full, you own the equipment.
Underwriting: The process lenders use to determine the risk associated with offering you financing.
Unsecured Debt: Any debt that’s not backed by collateral.
Variable Interest Rate: An interest rate that varies throughout the term of your financing according to the current market interest rates.
Working Capital: Total revenue minus debt. How much money your business has to work with.
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The content provided here is for informational purposes only. For financial advice, please contact our commercial financing experts.