How equipment loans work
Equipment loans are used to finance business vehicles, tools, fixed assets, and large computer systems. The equipment can be new or used. If new equipment, the loan can be for the total amount of the purchase. Used equipment is often 75% of the current cost of the equipment. It is easier to finance equipment that has a strong resale market (such as trucks) than specialized equipment with little resale use. Even though the equipment will be used as collateral, borrowers still need to show they can repay the loan. They must provide business financial statements and business tax returns. Sometimes borrowers may be required to personally guarantee the loan.
Difference between equipment loans and leasesEquipment loans and equipment leases are different. At the end of a loan, you own the equipment. At the end of a lease, you return the equipment and presumably start the lease process again. For bookkeeping purposes, if you have a loan, you put the asset and loan on your balance sheet. If you have a lease, you do not put them on your balance sheet, the lease payments are strictly operating expenses. In both cases, if you don't make payments, the lender (or leaseholder) will repossess the equipment. Information from the Equipment Leasing and Finance Association
The Equipment Leasing and Finance Association has developed Equipment Finance 101, with information on the benefits of equipment leasing, finance types, and loan/lease comparisons. Click here to go to Equipment Finance 101 Advantages and disadvantages of equipment loans