Equipment finance is one of the ways that an entrepreneur may acquire equipment for their starting or growing business. It may be distinguished from any other types of financing or loans, such as asset financing and traditional lending.
What is considered equipment financing?
Equipment is one of the important necessities in starting and in the actual conduct of a business, aside from the personnel costs and the capital needed. It is also the most expensive when it comes the funds needed for it. This is especially true for:
- Commercial kitchen equipment – ovens, burners, freezers, etc.
- Heavy equipment – forklifts, excavators, bulldozers, etc.
- Medical equipment – diagnostic, treatment, or laboratory equipment, etc.
- Shop fit outs – furniture, partitions, or furnishings
- Technological equipment – computers, laptops, printers, etc.
- Vehicles – trucks, vans, or buses
Equipment Finance
Equipment financing is a type of loan which is availed by a borrower (also called “debtor”) for a certain amount from a lender (also called “creditor”) to purchase equipment for the borrower’s new or existing business. This type of loan or financing is usually best for businesses whose capital remains low or has difficulty obtaining other sources of capital but aims to start or grow their business.
Learn the basics for equipment financing for startup companies in this article.
As such, equipment financing is common to the industry or sector of transportation, agriculture, construction, mining, and any other commercial industries.
This type of financing is usually done through an execution of a contract which details its terms and conditions. At the minimum, the various considerations in the contract are (1) the amount to be loaned, (2) the interest rate, (3) the term or duration, (4) the terms for a security or lien, if any, and (5) the remedies of each party when there’s contractual breach.
Given the complicated nature of these financing deals, and the large sums of money involved, many turn to a Canadian equipment leasing and financing lawyer for assistance. They can help better negotiate contracts, help business owners understand some of the legal speaking them, and make sure that everyone is aware of their responsibilities.
Know more about industrial equipment finance and how does it work in this article.
(1) Loan Amount
As with any other loan contract, the loan amount to be granted to the debtor would most likely depend on the debtor’s credit rating or history or the debtor’s creditworthiness. Thus, it’s important for a business owner to consider where to get the financing, given that a higher credit rating or history would also mean getting a higher amount of loan.
Since this is difficult for start-ups who usually have lower rating or history, or even none at all, alternative lending providers (e.g., financial institutions that are not banks) are the ones which are usually attractive to starting or struggling businesses.
(2) Interest Rate
For equipment financing, the interest rate is generally offered by the creditor and the debtor may only accept or reject the offer but may be negotiated depending on the credit relationship between them. Interest rates for equipment finance in Canada may range from 5% to even as high as 20%. Some creditors may also require that the entire interest amount be pre-deducted from the net amount to be received by the debtor, or may spread out the interest over the term of the contract.
(3) Term of Payment or Duration of Loan
The payment of both the capital and the interest, or the net amount, is dependent on the agreed term or duration of the contract. It may range from 1 year, 5 years, or even as long as 20 years, and this greatly depends on the amount of the financing. At the end of this term, the ownership of the equipment is thus officially transferred to the debtor or the business owner.
(4) Lien or Collateral
The creditor may require a lien over the debtor’s equipment purchased and the ownership of the equipment remains with the creditor even though its physical possession is with the debtor. A creditor may also require a collateral on the other personal or real properties of the debtor when such arrangement is stipulated in the contract. The only way to discharge or clear the equipment of the lien or security over it is the full payment of the loan.
(5) Remedies
Should the debtor fail to pay the creditor as stipulated in their contract, the creditor may re-possess the same equipment and/or the debtor’s properties where a lien was imposed upon. This is in addition to some other remedies or actions of the creditor against the debtor, such as action for damages or rescission of the contract.
This is another instance where an equipment financing lawyer will be Beneficial for either party to engage. They can be used to negotiate before court or proceedings or represent clients during court proceedings to ensure the best possible outcomes.
Read more: How can I get equipment finance for bad credit?
Other Terms
The contract may also have additional terms, conditions, or pre-requisites, such as:
- Balance sheet or cash flow statement
- Bank statements
- Business plans
- Tax returns
- among others
Is equipment financing considered debt?
Equipment financing may be distinguished from the traditional loan in certain matters. In the former, the payment of the capital and interest amounts are spread over the term or duration of the borrowing; while the latter may also use this arrangement but is usually a one-time payment of both the capital and the interest at the end of the loan period.
What is the difference between asset finance and equipment finance?
While both are used to acquire equipment (which are typically also an “asset”), these differ with regards to the lien or security required on the debtor.
- In equipment finance, to acquire the loan, a lien or security may be imposed on the subject equipment of the loan or upon the other properties of the debtor;
- however, in an asset finance, the assets of the business or the debtor will be used as collateral over the loan.
- As a result, the amount of loan in an asset finance will depend on the asset’s worth, while it is based on the debtor’s creditworthiness on an equipment finance.
Is equipment financing tax deductible?
Equipment finance in Canada is generally tax deductible but depends on the whether it is a bank loan or an equipment financing.
- For a bank loan, the tax deduction is only applied on the interest amount and not on the principal amount;
- while in an equipment finance the total amount borrowed (capital plus interest) may be deducted as an operating expense. This is because the Canada Revenue Agency (CRA) views equipment financing as a lease, hence the regulations of leases are also applied to it.
Is there anything else about the legal aspects of equipment financing in Canada that you would like to learn about? Leave a comment below!