To establish your business, you may be thinking of using equipment finance from a creditor or financial institution to get the equipment you need. However, it is better to consult your lawyer before you sign, so you understand exactly what you're agreeing to.
In this article, we cover the basics of equipment finance, including how lawyers can help you with this type of loan. In any case, you can also consult a Lexpert-ranked lawyer to find out more about this financing method.
What is equipment finance?
For Canadian businesses, equipment finance is one way an entrepreneur can acquire equipment for a new or growing business. It is a type of loan that a borrower (or debtor) takes out from a lender (or creditor) to purchase equipment for a new, existing, or expanding business.
Asset finance vs. equipment finance
It may be distinguished from other types of financing or loans, including:
- Traditional lending: In equipment finance, the payment of the capital and interest amounts is spread over the term or duration of the borrowing. Traditional lending may also use this arrangement, but it is usually structured as a one-time payment of both the capital and the interest at the end of the loan period.
- Asset finance: Both are used to acquire equipment (which is also considered an "asset"). As for the lien or security in equipment finance, it is imposed on the equipment funded by the loan (and may extend to other property of the debtor). On the other hand, in asset finance, the debtor's assets are used as collateral over the loan.
This means that the loan amount under asset finance will depend on the asset's value, while the loan amount under equipment finance is based on the debtor's creditworthiness.
Learn more about this kind of financing with this video:
Reach out to the best asset equipment finance lawyers in Canada as ranked by Lexpert if you need legal advice when entering a financing agreement.
Equipment that can be financed
This type of financing is usually not applicable to all types of equipment your business uses. It is usually best suited to equipment that is expensive to acquire, especially when your business has limited capital and other startup costs.
Here are some examples of the equipment that can be acquired through equipment financing:
- commercial kitchen equipment: ovens, burners, freezers
- heavy equipment: forklifts, excavators, bulldozers
- medical equipment: diagnostic, treatment, or laboratory equipment
- shop fit outs: furniture, partitions, and other furnishings
- technological equipment: computers, laptops, printers, scanners
- transportation vehicles: corporate cars, trucks, vans, or buses
This is why equipment financing is common in transportation, agriculture, construction, mining, and other commercial industries.
Advantages for businesses
Below are the advantages of this type of financing to help you decide whether this is the best option for your business:
- no additional collateral needed: because the equipment itself is the collateral, a businessowner who has little to no real property does not have to worry about putting up separate collateral to get the loan
- best for low cash businesses: this type of financing is often best for businesses with low capital or difficulty obtaining other sources of funding but that still aim to start or grow operations
- flexible contract or agreement: depending on the creditor, and with the help of your lawyer, the contract can be adjusted, including its term, method of payment, or the conditions on refinancing and sale-leaseback
Here's another video that explains how equipment finance works, along with its advantages:
If you're a start-up owner, check out our article on the basics of equipment finance for startups to learn more about how it works.
How can lawyers help businesses with equipment finance?
Many turn to a Canadian equipment financing lawyer for assistance because of the complicated nature of these financing deals, not to mention the large sums of money involved. Lawyers can generally help negotiate better contracts, explain the legal aspects of those contracts, and make sure that you're aware of your responsibilities.
Here are the other ways that equipment financing lawyers can help you:
Review the contract or agreement
The agreement or contract is the most important legal consideration in this transaction. Since it contains all the important terms, conditions, and requirements, lawyers are important to have by your side to:
- review the contract, especially if it is long and detailed
- tell you what it really means, sparing you the pain of going through all its legalese
- see if there are hidden terms that are detrimental to your legal interests
Checking the financing's interest rate
When interest rates are left unchecked, interest costs can balloon and put pressure on your business operations.
For equipment financing, the interest rate is generally offered by the creditor, and you only have to either accept or reject the offer. However, your lawyer can help you negotiate the interest, depending on your credit relationship with your lender.
Interest rates for equipment finance in Canada may range from 5 percent to as high as 20 percent. Some creditors may also require that:
- the entire interest amount be deducted upfront from the net amount that you will receive, or
- the pre-computed interest amount be spread out over the term of the contract
Examine the term or duration of the loan
The payment of both the capital and the interest (called the net amount) depends on the agreed term or duration of the equipment finance contract. This part of the contract is important, and your lawyer can review it on your behalf.
While the term is usually one year, five years, or even as long as 20 years, it will still depend greatly on the amount of equipment financing. At the end of this term, ownership of the equipment is officially transferred to you.
Choosing the right lender
As with any other loan contract, the loan amount will usually depend on your credit rating, history, or creditworthiness. It is, therefore, important to consider where to get the financing, since a stronger credit rating or history often allows you to borrow more on better terms.
Since this is difficult for start-ups, which often have lower credit ratings or limited history, alternative lending providers (such as non-bank financial institutions) have become attractive options for new or struggling businesses.
Learning about liens or security
Liens are among the important features of equipment finance, and how they work is slightly different from the other types of loans or financings. Lawyers can help by explaining how it specifically applies to your business' financing contract.
Usually, the creditor will require:
- a lien over the equipment, and the ownership of the equipment remains with the creditor, even though you have its physical possession
- a collateral on your other personal or real properties, if this is written and agreed in the contract
The only way to discharge or clear the equipment of the lien is to fully pay the loan, with capital and interest included.
Knowing what legal remedies can be pursued
If you fail to pay the loan, the creditor and their lawyers can pursue the legal remedies available to them under the contract. On your side as the debtor, lawyers can represent you before the court or in other proceedings to work toward the best possible outcome.
What are the pitfalls to avoid when doing equipment finance?
Below are some of the pitfalls you should avoid when doing this type of financing for your business:
Not paying the loan on time
If you fail to pay the creditor as agreed in the contract, the creditor may re-possess:
- the equipment that is the subject of the financing contract, and/or
- your properties, where additional liens were imposed upon
This is in addition to other remedies that the creditor has against you, including an action for damages or for rescission of the contract.
Not knowing its tax implications
Just like other types of loans, equipment finance also has an effect on your business' tax filings. In Canada, loan payments can lead to tax deductions, but the rules differ depending on whether it is a bank loan or equipment financing:
- as a bank loan: the tax deduction applies only to the interest amount and not on the principal amount
- in equipment financing: 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, where the regulations on leases are applied. It's better to consult a lawyer for more information on the tax implications of financing and loans.
Equipment finance: Importance of lawyers before clinching the deal
As with any contract, it is important to understand how equipment finance works before you finalize anything. This can support the long‑term health of your business and help protect you from legal problems down the line. Getting advice from a lawyer is vital, not only when something goes wrong, but also before you sign the agreement.
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