With equipment finance you can quickly get access to the vehicles, machinery or tools your business needs to succeed. In this guide we uncover the different types of equipment finance, how they work and explore all of the key considerations for businesses like yours.
For more advice tailored to your business requirements, speak to a member of our team.
Table of Contents:
What is Equipment Finance?
Equipment finance falls under the umbrella of asset finance. It’s a business loan alternative that allows organisations to spread the costs of paying for much-needed equipment such as machinery, vehicles, furniture and more.
There are 3 main types of equipment finance agreements:
Operating lease
The most suitable agreement for your business will depend on your objectives, current financial circumstances and what type of equipment you are looking to purchase. We explore each of these in more detail below (skip to: Types of Equipment Finance).
How Does Equipment Finance Work?
With equipment finance, a business effectively ‘hires’ a piece of equipment for an agreed period of time, rather than purchasing it all upfront. In some agreements (such as hire purchase), there’s an option to purchase the equipment at the end of the agreed timeframe, once all of the payments are complete.
During the length of the agreement (anywhere from a few months to a few years), the business has full possession and use of the equipment. However, if the business defaults on the payments the lessor can reclaim it, regardless of how much has already been paid off.
Equipment finance can be used to purchase all different types of equipment, but some common examples include:
Vehicles (cars, vans, buses or lorries)
Machinery for construction (cranes, diggers, excavators)
Office and IT equipment (computers, smart phones, tablets)
Farming and agriculture equipment (tractors, combine harvesters, crop balers)
Types of Equipment Finance
Hire Purchase:
With a hire purchase agreement, businesses make regular payments to utilise equipment over a specified time period, with ownership transferring to the business at the end of the term (dependent upon the completion of all payments). This financing option is particularly suitable for businesses seeking eventual ownership without the burden of a substantial upfront payment.
Learn more about hire purchase in our in-depth guide: Business Hire Purchase: A Complete Guide
Finance Lease:
With a finance lease agreement, businesses rent the equipment for an agreed-upon period, often covering a significant portion of the asset's useful life. At the end of the agreement, the business can either continue the lease (as part of a secondary lease agreement), return the asset (potentially upgrading it for ‘newer’ technology), or buy the equipment (minus what they’ve already paid).
However, there is often an option to purchase the asset at fair market value. This financing choice is best suited for businesses seeking flexibility, the capacity to upgrade equipment, and the potential for tax benefits.
Learn more about hire purchase in our in-depth guide: Finance Lease: A Complete Guide
Operating Lease:
With an operating lease agreement, the business also rents the equipment but, unlike with finance lease, there’s no option to buy the asset outright at the end. The equipment will always be returned to the lessor at the end of the agreed lease term.
This financing choice is best suited for businesses who are not looking to purchase the equipment in full but need use of it for a certain amount of time. In some cases, maintenance and repairs can be included as part of the lease agreement too.
Equipment finance: the pros
Most businesses find themselves lacking the cash reserves necessary to purchase costly equipment outright. This is particularly challenging for new enterprises, where such a significant expenditure could significantly disrupt cash flow. Even for well-established businesses, opting not to buy equipment outright is a prudent choice, especially when there are plans to upgrade to a newer model down the line.
This strategic approach enables business owners to sidestep the need to tap into reserves or working capital, preserving these resources for other business growth initiatives and supporting the overall flow of funds.
Let’s explore some more of the advantages in depth below:
Tax efficiency
When it comes to tax efficiency, certain types of equipment finance, such as equipment leasing or sale and leaseback, offer advantages over buying outright. Leasing an asset enables it to become a monthly expense that is tax deductible, making it a more tax-efficient option.
Here at Approved Finance Group, we have a specialised R&D tax team who are dedicated to assisting businesses in maximising their tax claims, ensuring they get the most out of their financial strategies.
Easy budgeting and management
Equipment finance provides you with consistent, predictable payments, enabling you to evenly distribute costs over time. This not only facilitates easy budgeting but also simplifies cash flow management, allowing you to concentrate on the core aspects of running your business.
Flexibility and scalability
Flexibility and scalability come hand in hand with equipment finance. For businesses experiencing growth, financing a piece of equipment allows for swift expansion without the substantial initial financial investment. Whether you're increasing production capacity or adding more vehicles to your fleet, equipment finance is a flexible way to scale growth.
Access to other lines of credit
Unlocking additional lines of credit is an often overlooked advantage when opting for equipment leasing over outright purchase. Equipment finance typically involves a consistent monthly expense, creating room for obtaining other forms of business finance simultaneously.
Whereas, if you purchase expensive equipment outright you might run into cashflow issues, preventing you from being able to access other much needed finance.
Equipment finance: the cons
Whilst it’s an appealing option for many businesses, when considering equipment finance for your company it’s important to weigh up the potential drawbacks, too. This will ensure that you are making the right decision for the future of your business.
Some of the potential disadvantages of equipment finance include:
Total Cost of Financing:
When factoring in all interest and fees, the overall cost of the equipment can end up being higher if acquired through equipment finance than if you purchase the asset outright.
However, purchasing outright isn’t always feasible, especially if the equipment is highly expensive. Additionally, the cashflow benefits of avoiding paying a substantial amount upfront could outweigh any extra expenses occurred.
Ownership Limitations:
Certain financing options may not grant full and immediate financial ownership of the equipment. So while you’ll be able to use it, you might not have full control over how it is used.
However, the delay in outright ownership might mean that you can easily upgrade your equipment and remain technologically up-to-date without the burdens of ownership. So in some circumstances, this one can be a significant benefit in the long run.
Dependency on Monthly Payments:
Failure to meet monthly payments could lead to your equipment being repossessed.
However, predictable monthly payments facilitate budgeting and financial planning. With responsible financial management, the risk of default can be minimised.
Residual Value Risks:
Businesses may be responsible for the residual value of the equipment at the end of the term.
However, carefully structured financing terms can help to mitigate risks associated with this.
Limited Flexibility:
Fixed terms may limit adaptability to changing business needs.
However, well-negotiated financing agreements can provide flexibility along with the ability to quickly acquire essential equipment to address their evolving requirements.
In each case, it's essential to assess the specific needs and circumstances of your business. While there are potential drawbacks, the strategic advantages of equipment finance can often offer valuable solutions to businesses seeking flexibility, cash flow management, and the ability to stay competitive in their respective industries.
Apply for Equipment Finance
Want to get the best equipment finance deal for your business? Enquire online with Approved or get in touch to speak to an expert today. With access to a panel of 125+ lenders and fast decisions with funding possible in as little as 24 hours, our asset finance brokers will get you the finance you need when you need it.
Our approach to equipment finance is straightforward and transparent, devoid of hidden fees or surprises. We aim to simplify the process, ensuring that obtaining financing is easy and accessible. Rest assured, our no-obligation application won't have any impact on your credit score. To kickstart your financial journey, we simply require your name, business name, some basic business details, and the specific funding amount you are seeking.
Equipment finance: FAQs
How long can you finance equipment for?
The duration of an equipment loan or lease is determined by various factors, such as the equipment's cost, anticipated depreciation, and the lender's terms. It could be as short as one year or a longer term agreement up to seven years.
Depending on your type of agreement, you may then keep the equipment at the end of this time period or give it back to the lender.
Whatever your requirements, there are flexible options available to meet your specific needs. Speak to an asset finance broker to learn more.
Which type of businesses can use equipment finance?
Equipment finance is commonly used to purchase vehicles or advanced machinery, but it certainly isn't limited to one type of equipment or industry.
We've worked with a range of businesses to help them secure equipment finance including:
Bars, pubs and restaurants
Cafes and coffee shops
Construction businesses
Event organisers
Farming businesses
Fleets of busses, coaches, vans and lorries
Mechanics
Office and IT equipment for a range of businesses
Warehouses
If you need help financing equipment for a specific use case, please get in touch with our team to see how we can help.
