Equipment Financing Terms and Processes. In Plain English.
Note: These generally appear in chronological order when they would be encountered in a typical equipment financing transaction.
Applying / Application
The first step in any equipment financing transaction is applying for financing. The amount of information you need to provide varies by lender, as does the way you do it (online or off). For example, most banks will want several years of financial records and tax returns, and will take their sweet time in approving you. A credit card wants little more than your address and signature.
Crest Capital’s Take: For financing under $250,000, we have an easy online application. You can apply right from your desk, and leave your financial statements and tax returns home too (we don’t need to see them). You can also expect an answer within a business day, if not faster.
Similar to applications, every lender will have their own equipment financing approval criteria. Key factors are time in business, revenues, good credit, profitability and more.
Crest Capital’s Take: Crest Capital approves more businesses than banks, but fewer than credit cards. Our general criteria are two years in business and no bankruptcies in the last 7 years. This means millions of small businesses can easily finance equipment with us.
Types of Equipment Financed
Your lender may or may not finance the type of equipment you need. For example, many lenders will shy away from financing used equipment or software.
Crest Capital’s Take: Crest Capital finances equipment, vehicles, and software. Financing used equipment is something we do as well – even private sale equipment. Almost anything a small or medium business needs can be financed through Crest Capital.
Types of Equipment Financing Offered
EFA’s (Equipment Finance Agreements)
This is “classic” equipment financing. Your lender pays the seller in full, you take ownership of the equipment, and you pay back the lender in monthly payments. It’s simple, and you can take advantage of Section 179 and/or depreciation.
Leasing and Leases
Leasing is where you technically don’t own the equipment (but, depending on the lease, may be able to buy it at the end of the term). Because you do not own the equipment, you cannot take advantage of Section 179. For small and medium businesses, leases are generally only used for equipment purchases when a company can’t “officially” take on more debt.
Crest Capital’s Take: Most of our equipment loans are EFA’s, due to their simplicity and the strength of Section 179. If a customer requires it, we can also utilize many equipment lease types, from $1 leases to FMV leases and many others. Talk to your Crest Capital rep for advice on this. You can also visit https://www.crestcapital.com/lease_loan_structures to read about lease types.
Collateral and Liens
Most lenders will want some type of collateral and/or liens to help secure any equipment loan or lease.
Collateral is an asset(s) a borrower puts up to guarantee a loan.
A Lien is the legal claim against a business’ asset(s). For simplicity, you can consider the lien is the “chain” that attaches the collateral to the lender. Anything with a lien cannot be sold or given away by a business without permission from the lender.
Some lenders will use only the equipment itself as collateral. If a borrower fails to pay, the lender uses the lien as the legal claim, and takes possession of the equipment.
Other lenders (like banks) will go MUCH further, and put what’s called a “blanket lien” on a business, which effectively ties up all assets. For example, a company with a blanket lien cannot trade in their delivery truck without permission, even if the truck has been owned for a decade.
Crest Capital’s Take: Crest Capital uses only the equipment itself as collateral. We leave the rest of a customer’s assets alone. This gives small businesses far more financial flexibility than they get with a bank.
Covenants and Restrictions
For many lenders (such as banks), a blanket lien is not enough. They will put other covenants and restrictions on a borrower. These can include any and all of the following:
Keeping a minimum balance of 80% of the loan’s value in the bank at all times.
Requalifying for the loan annually.
The right to call in the entire loan at any time.
The ability to restrict a borrower from taking on other loans/debt.
Crest Capital’s Take: We don’t bother with any of these. You’re free.
Equipment Financing Rates
The rate is the interest that a lender charges a borrower. It is also seen as “front and center” when comparing equipment lenders – i.e., many borrowers perceive the absolute lowest rate as the best deal, which is not true at all in equipment financing (more on this in a moment).
Rates are set by taking the Federal Funds Rate (aka the “Federal Interest Rate” you always hear about on the news), and then adjusting it upwards based on lender risk.
Lender risk is generally arrived at by two different measures all lenders use: lending criteria (who qualifies for equipment financing based on time in business, credit scores, revenues, and other factors), and the previously mentioned collateral, covenants, and restrictions.
The trick here is the more restrictions a lender has, the lower their risk is, hence the lower the rate. This is why a bank can offer the lowest rate – they mitigate their risk significantly by insisting on blanket liens, minimum balances, and loan requalifying. By tying up all a businesses’ assets and making them keep an 80% bank balance, they can be reasonably sure they are getting paid back. Or else.
Crest Capital’s Take: We utilize a very business-friendly risk-rate balance. We use the equipment itself as collateral, but otherwise we leave your business alone. This means our competitive equipment financing rates are slightly higher than a bank’s, but with unequaled freedom and financial flexibility.
Soft Cost Financing
The price of the equipment is rarely the final price you pay. There are what are called “soft costs”, and can include taxes, delivery, installation, maintenance agreements, maybe optional modifications, etc.
Your equipment lender may or may not allow you to finance the soft costs. In fact, since the majority of soft costs are intangible, most lenders will not finance them.
Crest Capital’s Take: Unlike most lenders, Crest Capital WILL finance soft costs. In fact, a full 25% of the total equipment finance agreement can be soft costs.
Equipment Financing Term Lengths
This is the length of your equipment finance agreement or lease. Typical terms generally run anywhere from 24 to 72 months, with the majority of deals in the 36-60 month (3-5 year) range.
Crest Capital’s Take: We work with our customers to get them the term and monthly payment that makes the most sense to them.
Equipment Financing and Section 179
One of the strongest uses of equipment financing is buying section 179 qualified equipment. This allows a company to take the full price of the equipment as a deduction this year, while only making a few payments. Depending on the size of the deduction, this can result in saving more in taxes than is paid out. However you look at it, this is a very positive situation for a company’s finances.
Crest Capital’s Take: We offer Section 179 qualified financing, and are the only equipment lender endorsed by Section179Org.
Equipment Sellers and Equipment financing
Did you know that if your company SELLS business equipment, you can sell more of it by offering financing? The great part is, you can do this without financing anything yourself – you simply partner with an equipment financing company. You make the sale, THEY handle the financing, and you get paid in full right away.
Crest Capital’s Take: We have an excellent, free vendor program that allows equipment sellers to offer hassle-free financing (we’ll even brand it to you). This requires no work on your end and can make sales skyrocket.
All Information you submit here will be Safe, Secure, and Confidential. Your e-mail address is used only to conduct communication between you and Crest Capital, and is never sold or given to any third parties.