All businesses rely on some kind of equipment to function, whether that is computers for an office or heavy machinery for a construction site. In businesses where expensive equipment is needed, it is rare that you will have the cash flow necessary to pay for it outright, which is where equipment finance comes in. By taking out a loan to cover the cost of the equipment, and securing it against the equipment itself, you can make the necessary upgrades without hurting your cash flow.
There are a number of different equipment finance options for business, and it is important that you understand the pros and cons of each before making your decision.
What is a Chattel Mortgage (Secured Loan Agreement)
A Chattel Mortgage or secured loan agreement is a fixed-term loan secured against the equipment that you are buying. This works in a similar way to a home loan, with a much shorter period.
The lender gives you the money that you need for the equipment and you buy it outright. You own the equipment, but it acts as collateral for the loan should you be unable to repay the money, so you are unable to sell equipment without the lender’s approval. If you default on repayments, the lender will take ownership of the equipment and it will be sold to recoup the money that you owe.
What is a commercial hire purchase?
Commercial hire purchase is an agreement between you, the lender, and the company that is selling the equipment. The lender buys the equipment directly and then you buy it from them in instalments over a set period. You are still able to use the equipment while you make payments but you take on the risks of ownership. Commercial hire purchase can be a more flexible form of equipment finance, but it does still have its restrictions.
What is a finance lease ?
A finance lease is a common form of equipment finance for high value items with a long lifespan, like construction equipment, for example. The lender will purchase the equipment outright and then rent it to you. You do not own the equipment during the lease, but you do take on ownership responsibilities. It is a more flexible form of equipment finance because you have a number of options at the end of the payment period; return the asset, make an offer to buy, or extend the lease.
An operating lease is a similar equipment finance option to a finance lease, but you do not have the option of buying the equipment once the loan is paid.
These are your main options for equipment finance, so make sure that you weigh up the pros and cons of each and find one that works for your business.