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The Complete Guide to Applying for Equipment Financing

Regardless of which industry your business belongs to, access to the right equipment is critical to run operations and grow. Most companies struggle with their cash flows at one point or another, and investing in new equipment is challenging.
That’s where equipment financing comes in. Essentially a loan that’s specifically used to purchase equipment or machinery, this form of financing is ideal for businesses that need extra machinery to keep up with rising demand and function at their best. 
In Canada, especially, businesses are increasingly opting for equipment financing. Today, there are many lender options for equipment financing Canada-wide that cover a range of hard assets, including restaurant appliances, industrial machinery, transport vehicles, and gym exercise machines. It also covers software, so if your retail business requires essential payment processing software, equipment financing has you covered. Other countries such as the United States are also witnessing a rise in equipment acquisition.
So, if your business’s next step is to grow, then equipment financing is an excellent option for you to consider. Here’s what you need to know to apply:

How Does Equipment Financing Work?

Equipment financing can help you fund up to 100% of the amount required for used or new equipment necessary for business operations. The application process is usually fast and provides you with quick access to cash. Additionally, only a limited number of documents are required, ensuring there isn’t too much paperwork you need to fill out. 
The equipment you attain will essentially serve as collateral, and you’ll need to make regular payments towards the amount you’ve borrowed. Once the amount is paid in full, your business will own the equipment.
Compared to other financing options, equipment financing is much easier to qualify because the amount you need depends on the type of asset you need to purchase. While your financial information, such as your credit score, does matter, the decision isn’t based entirely on it.
Additionally, since the equipment serves as collateral to secure the loan, you won’t need to put up any other form of collateral like your business or home assets, which is typically the case in other forms of financing.

Rates & Terms

The financing terms you’ll get will be determined by the lender you opt for, making it extremely important for you to consider different options. Interest rates typically vary from 5% to 30%, and the financial prerequisites vary from case to case. 
Typically, business owners with higher credit scores and more significant down payments will be charged a lower interest rate as compared to those who have less money down and lower credit scores. Repayment works like a standard loan and terms could include 3, 7, or even 10 years. Keep in mind that most lenders will set terms according to the expected lifetime of the equipment.

Steps to Apply

Steps to Apply
Now that we’ve discussed the basics of equipment financing and what it entails, here’s what you should do to apply for one for your business.

Know Your Current Financial Position

You need to know your business’s financial status inside out before applying for equipment financing. Determine how important it is for your firm to acquire the asset you’re applying for and create a forecast of the monthly payments to figure out how they fit into your budget. 
Knowing how a financial obligation could potentially impact your profits and revenues can determine whether it’s feasible for you to go down this route. Being aware of your financial status will also help you have a more productive conversation with potential lenders and negotiate a better deal.

Research Lenders

One of the essential steps to getting anything is researching your options. The same extends to equipment financing too. Different lenders offer different deals that may vary according to the interest rates and repayment terms. Hence, once you’ve shortlisted potential lenders, you should evaluate them before submitting your applications.

Ensure You Qualify

When you’re evaluating your options, you need to check their eligibility requirements. These conditions will typically differ from lender to lender, and you need to determine whether you even meet them before spending time on an application.
Most lenders have the following criteria:

  • Years in operation: Many lenders will only provide financing if your business has been operational for a certain number of years.
  • Revenue: You need to prove your business’s financial health by meeting the minimum requirement for revenue, demonstrating your ability to sustain your business.
  • Credit scores: Equipment financing typically requires a credit score of more than 550. Many lenders also prefer credit scores of at least 660.

Some lenders may also have additional requirements related to your business finances, while others may be less strict, making it essential for you to do your research.

Figure Out Your Ability To Make A Down Payment

Applying for equipment financing will typically require a downpayment for your business to qualify. Lenders want security, and a downpayment will instill confidence in your ability to meet the financing obligations. These downpayments usually fall in the range of 5 to 10%.
If you’re struggling to accumulate the cash required to pay the downpayment, your request for financing may be declined. In that case, you should explore another lender or apply once you’re in a better financial position.

Start Applying 

Once you’ve followed the steps above, you can start the application process. How extensive the process will differ according to the lender you choose. You should compare different options and ensure you’re not applying to multiple lenders at the same time since several hard credit pulls can hurt your business and personal credit scores. Moreover, it would be better not to take a loan if you’re already paying off a past loan, an act known as stacking

Final Thoughts

Equipment financing is an excellent financing option for business owners due to their relatively low-interest rates and fast processing times. However, it’s still crucial for you to weigh out different financing options to determine your business’s best way forward.
Has your business ever utilized equipment financing? What was your experience like? Let us know in the comments below.

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