Basics of Equipment Financing 101: What You Should Know

Enacted into law in 2017, the Tax Cuts and Jobs Act offers American construction companies an added tax incentive to procure construction equipment. Under the Act, eligible businesses now enjoy up to $1 million and $2.5 million in allowable deduction and annual equipment purchases, respectively, up from $500,000 and $1 million, respectively. On top of that, the Act increases the bonus depreciation of used and new equipment that construction companies can expense from 50% to 100% for construction equipment acquired between September 27th, 2017, and January 1st, 2023. According to the Equipment Leasing and Finance Association, this piece of legislation has positively impacted the $1 trillion equipment finance market, which recorded a 7% growth in the first half of 2018, as contractors increasingly look to take advantage of these tax benefits to acquire equipment. With this in mind, here are the basics of equipment financing.

Equipment Financing 101 – An Overview

Equipment financing is a type of loan intended for the purchase of business-related equipment. Like most other loan offerings, equipment financing comes with regular payments, including principal and interest, over a specified duration. It is worth noting that some equipment financing lenders offer different repayment options to cater to different borrowers. However, even such lenders typically decide the exact repayment terms. The most common repayment options include:

  • Fixed monthly payments
  • Tiered payments based on the value of the equipment in question
  • Seasonally adjustable payments based on a borrower’s cash flow

Heavy Equipment Financing 101 – Self-Secured Loan

Because equipment financing is a self-secured loan, you can get up to 100% equipment financing even without a down payment. More specifically, the equipment you intend to purchase will serve as the loan collateral, meaning the lender will place a lien on the equipment. Additionally, the lender may place a lien on your other business assets and ask you to provide a personal guarantee to serve as collateral against your loan. Hence you could potentially lose your personal and business assets if you fail to repay the loan.

 Equipment Financing 101- Maximum Loan Amount

Different lenders have different loan limits depending on factors such as their underwriting guidelines, loan products, and risk appetite. That said, some of the factors which determine your maximum loan amount include:

  • The type of equipment you intend to acquire
  • Whether the equipment is brand new or used
  • Your business’s annual revenues
  • How long you’ve been in the construction business
  • Both your business and personal credit ratings

Advantages of Equipment Financing

 As a self-secure loan, the following are the advantages of equipment financing:

  • Lenders can ease eligibility requirements.
  • Different repayment options are often available.
  • Up to 100% of equipment financing options are available.
  • Repayment terms are flexible and can be amortized throughout the lifetime of the equipment.
  • The application process is relatively simple with quick access to financing.
  • Lower tax burden
  • Improved personal and business credit scores

Disadvantages of Equipment Financing 

The following are a few disadvantages of using equipment financing:

  • The interest rates cause equipment financing to be more expensive compared to buying in cash.
  • By the time you finish repaying the loan, your equipment could be either obsolete or dilapidated, forcing you to replace it with newer and better versions.
  • Unlike equipment leasing, you are responsible for all repair and maintenance and repair costs.
  • Depreciation-related tax deductions will likely prevent you from deducting the full cost of the equipment each year.
  • To cover the loan’s cost, a lender may put a blanket lien on your other business assets or request a personal guarantee.

Use these basics of equipment financing to get the most out of equipment financing and avoid the potential pitfalls of this loan offer. Our agents at Pittman Insurance Group LLC are able to evaluate your commercial insurance needs and provide you with policies for both your home and business. Whether you are an independent contractor or are working remotely, it is up to you to protect your investments. Contact us today to discuss your options.

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