The 5 Terms You Should Know Before Equipment Financing
Businesses need equipment, and equipment is expensive. Almost every business will need to seek funding to outfit their office, upgrade their hardware, or buy a machine that will make them more productive and profitable. There are several options for equipment financing, but before you begin the application process, it will be helpful to know these key terms.
If you lease equipment, it is the property of the lender during and after the term of the lease. The payments will be fixed over an agreed upon period. An advantage of this type of equipment financing is that part of the agreement is a service contract, where the lender is usually responsible for reasonable repairs and maintenance.
The term length is the agreed-upon number of weeks, months, or years over which a lease or equipment financing loan will be paid back to the lender. The term length will vary depending on the industry and type of equipment, but 24 to 36 months is fairly standard across the board.
“Flexible financing” refers to an equipment financing plan that is specifically customized by a lender to a borrower.
Skip, Step, and Deferred Payment
Skip, Step, and Deferred Payment is all popular types of flexible financing. A Skip payment plan allows the borrower to not make a payment during a month that generates less revenue for their business. A Step payment plan is structured so that payments get higher as the lease goes on. This is helpful because of the lower payments at the beginning of the term. The thinking is that as the equipment helps the business become more profitable, the easier it is for them to make higher payments. Along similar lines, Deferred payment enables the borrower to skip the first several payments and begin the repayment period slightly later, theoretically after money begins to come in.
A popular and mutually beneficial type of equipment financing, lease-to-own arrangements give the ownership of the equipment to the borrower after the term of the lease is over. The major advantage is that at the end of the term, the borrower owns the equipment outright and it is now an asset. There are disadvantages to consider, however, such as the fact that equipment may be outdated by the end of the term or “balloon” payments that make a percentage of the price of the equipment due at the end of the term in addition to the final payment.