Understanding What Makes Equipment Loans Different

October 9, 2017

What exactly is an equipment loan, and how is it different from applying for other commercial loans? We asked Brandon Reyes, Vice President and Commercial Loan Officer, to break things down for us.

Equipment loans help companies purchase specific assets that are an integral part to that business’s day-to-day functions. Examples of such assets include a front-end loader (called yellow iron) for a contractor, a work van for a plumber, or a lathe for a manufacturer. These are simple examples, but they are usually non-real estate items that are classified on a business’s balance sheet under long-term assets. These assets are vital in the customer’s ability to grow as they are involved in creating a product or completing a service.

Like for other commercial loans, the application process involves a check on the creditworthiness of the business and its owners. This includes a completed business application and at least two years of financial information on the business and all owners. The overall process can be quick from the time of application to closing the loan, with proper preparation from the business.

Buy vs. Lease: Is One Better than the Other?
Financing a purchase allows the business to retain ownership of the asset after paying it off but usually requires a down payment at the time of purchase. Leasing requires the asset to be given back at the end of the lease but may not require a down payment. Each transaction is unique, which is why we encourage our customers to discuss with their banker or accountant which option is best for them.

Do Rates and Terms Vary Significantly for Equipment Loans? 
“The number of months financed remains the largest variable as the bank is trying to match the useful life of the equipment to the length of the loan,” according to Brandon.  Interest rates are usually geared more towards the borrower’s credit and financial history but can change based on the type of equipment (specialty vs general use).

It’s best to have a good idea of what equipment you are looking to purchase as this will determine the general terms a bank can offer. Commercial loans require more involvement than personal loans. Therefore, we encourage borrowers to reach out early in the process to avoid frustrations even if they don’t have every single detail regarding the equipment.

Red Flags that Might Ruin the Chances for Approval 
We look at every borrower individually and try to understand difficult situations someone may have encountered in the past. Our business is ultimately about relationships, so we encourage every borrower to be open with our team.  “An honest dialogue helps the bank in finding a solution to any possible red flags,” says Brandon. “You may be surprised that an issue can often be mitigated in some form or fashion.”

Is Insurance Approval Required before You Apply? 
No, but we advise customers to begin the conversation with your insurance agent around the same time as applying for a loan. Equipment insurance plays a vital role in understanding the full cost of ownership for the business and is necessary to have at the time of the loan closing.

All loans subject to credit approval.