Equipment finance describes a loan or lease that is used to obtain business equipment. Business equipment may be any tangible asset other than real estate – examples include office furniture, computer equipment, machines used in manufacturing, medical equipment, and company vehicles.

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KEY TAKEAWAYS

 

• Equipment finance describes a loan or lease that is used to obtain business equipment, which can be any tangible asset other than real estate.

• Equipment financing may be through obtaining a loan to purchase equipment or by leasing equipment.

• Whether buying or leasing is a better option usually depends on the nature of the equipment being financed and the borrower’s ability to obtain a loan at favorable terms.

 

Understanding Equipment Finance

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Equipment finance is an important part of business operations for a couple of reasons. First, for a startup or early-stage company, equipment financing may be an essential step in getting the business going.

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Second, because equipment financing is typically used to obtain costly equipment, the debt obligation incurred represents a significant financial commitment. Therefore, business owners or company executives must carefully consider any equipment finance plan and try to secure the best possible financing terms.

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There are two primary options for equipment financing: obtaining a loan to purchase equipment or leasing equipment. Whatever option may be best for your business depends on several factors, such as your business’ credit rating (which impacts the interest rate at which it can borrow money) and the useful life expectancy of the equipment being financed.

 

How To Choose Which Equipment Finance Structure?

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The key considerations in choosing between the different equipment finance products are as following.

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1. Tax: Operating and Finance Lease payments are fully tax deductible (vs Chattel Mortgage and Commercial Hire Purchase, where only the interest component of the payment is tax deductible). This needs to be weighed against the fact that under a Chattel Mortgage and Commercial Hire Purchase the business can claim depreciation on the equipment (this is not the case under Operating Lease and Finance Lease structures as the equipment in these cases is owned by the Lessor and not the business). Some financial modelling is required in order to determine which product is the most tax efficient.

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2. On Balance Sheet vs. Off Balance Sheet: Business owners may have a preference as to whether they have legal ownership over the equipment and carry it on its balance sheet or whether the equipment is held on someone else’s balance sheet.

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3. End of Term Risk: With Chattel Mortgage and Commercial Hire Purchase the equipment is owned by the business and there is no end of term risk. For operating and finance lease, there is end of term risk for the business (i.e. may not be able to purchase equipment from Lessor or Lessor may require a higher than market payment for ownership transfer).

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4. Flexibility: Operating leases in particular can be structured to give the renter a high degree of flexibility. This may include the ability to return the equipment before the end of the lease. It may also include an option to purchase the equipment outright during the lease term or to upgrade equipment.

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Business owners considering equipment finance should also consider Business Term Loans.

Equipment finance is a good option for financing equipment over the medium to long term. This range of products could be considered alongside a Business Term Loan (which is in essence a chattel mortgage).