EQUIPMENT FINANCING

Use Your Machines To Get Equipment Loans in Singapore

Equipment Financing

In many industries, such as construction, the business cannot begin without first having hard assets. Hard assets are usually large equipment, which includes machines like tractors, generators, heavy transportation lorries, commercial ovens, and logistical equipment to name a few.

As you can imagine, a classic “chicken and egg” problem is often encountered by entrepreneurs in such industries. It is virtually impossible for a new business to obtain the necessary equipment before the business starts operating and bringing in a stable revenue.

But at the same time, it is also impossible to get the business to start operating and generating cash flow without the necessary equipment.

Therefore, the only way around this catch-22 situation is to have a capital injection, be it through equity or debt. However, with all things being equal, approaching the banks or institutional lenders to help finance the needed equipment is always a better idea.

Debt financing, in the long run, will always be more cost effective then equity financing. Within the wide scope of debt financing, there is equipment financing, also known as equipment loans, which refers to a term loan that is given by the lender for the sole purpose of purchasing equipment.

Unlike all the other types of unsecured business loans, the financier puts a charge on the equipment, and the equipment itself becomes the collateral. While mostly still a long shot in the dark, at least there will be now be an avenue to help many businesses that face the same problems.

What is Equipment Financing?

Simply put, equipment financing is a loan that even fresh business owners can qualify for, with the sole purpose of purchasing equipment for the business. With the equipment standing in as collateral for the loan, if a borrower should default on payments, the lender has the legal right to seize all the equipment, and to sell them to recover some money.

What is the Equipment Financing process?

In equipment financing, an equipment loan is extended to a business that needs to purchase a large and costly equipment, such as a truck or a crane, but are unable to afford it now because of insufficient cash flows.

In most cases, an institutional lender or bank will extend a loan of up to 80% or 90% of the machinery or equipment price, where the borrower will then have to make a down payment of the remainder sum, and repay the equipment loan, with interest, on a monthly basis over a reasonably long period.

Entirely dependent on the financial strength of the company, the Director’s past credit history, outstanding loans, cash flow projections, and the industry that the borrower’s business is in, there is a myriad of banks and institutional financiers who offer a whole span of various equipment financing deals.

You can get business financing from traditional banks, alternative lenders like the crowdfunding platforms, and the bigger private financiers like Orix Leasing and Ethoz Capital.

Should I Get An Equipment Loan?

The thing about equipment financing, is that it is only ideal and optimum for a very sweet spot of businesses that fit a certain bill.

For one, it would only make sense to get an equipment loan IF there was a real need for a commercial or industrial equipment that is to be used for a long time to come, otherwise there is a risk that the equipment could become obsolete before the loan tenure is up.

The only caveat in these situations is the business must have cash for a down payment. If the equipment you are purchasing will be outdated or obsolete before the end of the loan term, equipment loans are not the best option.

In situations where your business needs equipment, but you do not have a robust operational and credit history, or any money to put down, an equipment lease is likely to be a better fit. An equipment lease is also a good option for items that do not have a long useful life and that need to be replaced often.

Entirely dependent on the financial strength of the company, the Director’s past credit history, outstanding loans, cash flow projections, and the industry that the borrower’s business is in, there is a myriad of banks and institutional financiers who offer a whole span of various equipment financing deals.

You can get business financing from traditional banks, alternative lenders like the crowdfunding platforms, and the bigger private financiers like Orix Leasing and Ethoz Capital.

What are the interest rates for equipment financing?

As with any form of debt financing, the loan will always cost more than making an outright purchase. However, in most cases, there is usually a need for a loan in order to purchase the equipment that the business requires, simply because of the lack of upfront cash. Furthermore, even if there was sufficient cash to make an outright purchase, sometimes it would still make sense to make monthly payments as it helps to preserve cash flows, and it allows you to remain more liquid and secure.

As with most term loans, there are the choices of a long-term or a short-term equipment financing, which can vary in tenure from 6 months up to 5 years. Interest rates can vary from about 3% to 5% percent, depending on a myriad of factors. Some of the key assessment criterion involve the type of equipment, health of company cash flows, sustainability of business, depreciation value of equipment, and the amount of financial commitments that company has.

Most financiers will be able to finance up to 80% or even 90% of the equipment’s value, albeit still subject to credit review. This would essentially mean that companies are usually expected to make a 10% to 20% down payment before a loan is even approved. In fact, in proportion to the value of the equipment, the larger the down payment, the lower the interest rates. We are also always of the idea that before taking up any loans, you should always try to find out about the costs of funds first. More than just interest rates, financiers will always charge borrowers with a processing fee, application fee, or even a late repayment fee. It is imperative that you understand the contract and agreement that you are going into. Be sure to make it a habit that you must read all contracts thoroughly so you are aware of all added expenses and how it can affect your profit margins or cash flows. And if at any point, you do not feel comfortable with the financing arrangements, remember that you can always keep searching for a better deal as equipment loans can vary in rates from lender to lender.

Anyway, it would also be good to keep in mind that the all interest paid on an equipment loan is tax deductible, which greatly reduces the cost of equipment loans.