What is Equipment Capital And How Your Business Can Take Advantage of It

If you are running a business or looking to start up a new business, you will know just how expensive it is to do so. You have to take everything into consideration including permits, registrations, employees, and naturally, equipment and resources. But if you are in the manufacturing, transporting, or servicing industries, those equipment costs can sky-rocket. 

Buying this kind of equipment can make a sizeable dent in your pocket, no matter the size of the business. Whether it is upgrading, replacing, or buying completely new, these vital components to your business can come at a hefty price tag. 

So, we took an in-depth look at equipment capital. What it is, how to raise it, and how it can come in handy for your business going forward.

What is Equipment Capital? 

Let’s start with the actual definition of equipment capital. These are the funds used to purchase and/or maintain the equipment needed to run or support the business. 

Capital is usually a long-term investment of sorts and is the owner’s equity portion of the investment. This capital purchase can be depreciated over a pre-defined useful life and expensed as operating expenses in the balance sheet. 

Because these assets have a lifetime of more than a year and are frequently used, they often come with maintenance plans or require regular maintenance. This is in order to get the best economical effect of their use in running the business. The capital required can often be quite substantial and unaffordable for a lot of companies, a reason why there are a number of options available to companies to raise this capital. 

You can consider the capital needed for equipment as working capital. These are the funds needed to maintain the operational expenses of a business on a month-to-month basis.

What Kind of Equipment Needs This Kind of Capital?

You may be wondering what kind of equipment we are referring to. The common term for these kinds of assets are in fact, capital equipment. This is crucial equipment that either supports the business or produces the commodities or products for the company. 

Each asset or bit of equipment needs to be valued at over $5,000 for it to fall within the capital equipment bracket and needs to have a useful life of over a year. Companies who frequently invest in these types of assets are either continuously expanding their operations or keeping up with technological advances. 

For smaller capital outlays and equipment under $5,000, it is usually encouraged to fund these via credit card facilities, business overdrafts, or term loans over financing or leasing options. The larger equipment that we are discussing is best funded by dedicated asset funders or funding facilities provided by the equipment/machinery manufacturer.

Capital equipment may differ across various industries, but includes assets like machinery, lifting systems, inventory transportation equipment or warehouse racks and trucks and trailers. 

How Do You Acquire Equipment Capital?

The next thing to look at is how to actually acquire this capital and get your equipment funded. As mentioned earlier, for anything over $5,000, you will need to look for something bigger than a normal loan. There are a number of companies that specialize in asset finance, which you can approach to finance your equipment. 

Some companies provide overall asset finance, and tailor packages for your needs, while others specialize in specific industries or for highly specialized equipment. One excellent example of this is the aviation industry. Due to the unique needs and operations, operators are more likely to approach aviation finance institutions than a non-specific company or even bank. 

In these cases, the institution has established relationships and partnerships with various industry-related suppliers and financial institutions in order to provide a full turn-key service to the company. This will usually mean that if there are maintenance requirements and costs on the equipment, it can be fulfilled by the supplier at an agreed-upon reduced cost, and will most likely fall within the maintenance plan.  

What Equipment Funding Options Do You Have?

The next thing to consider is what kind of financing option you actually want and can afford. You will usually have three options at the finance company. Each option comes with its own pros and cons and you will need to consider all before jumping in and choosing the first option presented. 

There are three ways asset financial institutions structure their loans for equipment capital; financing for a purchase, rental agreements or by providing a leasing option.

Asset Finance Loan 

The asset finance company can support you in actually purchasing the equipment by providing you with a loan which is tailored for your needs. Here, you will be able to agree with them on a specific installment, set term to pay it back as well as the interest attached to the loan. 

The term of the installments is usually set according to the lifespan of the equipment and can range from one year to five years.  So, if IT equipment depreciates over three years, the financier will usually set the term for around two years. 

It is important to keep in mind that while you are still paying off the installments, the lender will own the product and if you default or can’t continue paying the installment, they will have legal ownership of it and will be able to recover the outstanding amount from you. You will also not be able to sell the equipment while you are still paying for it. You will need to settle the remaining installments before selling the equipment on to someone else. 

You may also approach the financing company for the capital to assist with the other aspects of running your business. Not only can you purchase inventory, but you can use it to pay short term debts, run day-to-day operating expenses, and even pay wage shortfalls. 

In many cases, the financing company can tailor-make a package that will include a maintenance or service plan for the equipment. They will use their contacts of suppliers to assist you with the upkeep of the equipment.

Renting 

The renting of an asset is a more temporary solution to your equipment needs. This is a form of acquiring equipment that is needed on a short-term basis by paying a set fee for that amount of time. Because of the high price of the equipment, and the short-term need for it, you can approach certain suppliers for rental contracts, to return it directly to them at the end of the period. 

The cost of the rental will usually be a lot higher than installments to pay it off as the supplier will need to recover the costs of buying the equipment themselves, as well as need to make a profit each time. 

So, when do rentals come in handy, you might be asking? It could be a great option when you need a very specialized and expensive piece of equipment for a few weeks or even months. Take a crane in construction into consideration. You might not need to buy one but need it for a certain project for a short period. 

Rentals also work in industries that are rapidly evolving when it comes to technology. The IT industry is a great example. In many cases, technology could overtake the equipment that you are using in under a year, and it makes more financial sense to rent. It is important to know that rental costs are expensed on the income statement for both accounting and tax purposes.

Leasing 

This is a contract similar to rentals where you rent equipment for a set period of time and according to certain terms. There are, however, more conditions that come with a lease contract, and the lessor is held to maintain the equipment in the contract. 

A lease is usually a long term contract and can last anywhere from a year to ten years. Unlike a payment plan and a rental agreement, there can be significant penalties should either party not hold up to their side of the contract. A lease can also result in what is known as a bargain purchase option in which the equipment can be bought for an amount that is significantly lower than it is worth. Keep in mind, the amount of the lease installments is usually inflated, so it ends up actually being worth it to buy it off. 

From an accounting perspective, leases typically fall into two main categories; operating leases and capital leases. This means that if the lease terms meet certain criteria, the lease will be considered capital. These terms include the fact that the lease payment needs to make up most of the fair market value of the asset. It will also need to make up most of the effective useful life of the asset, and there has to be a bargain purchase option.

How Can Equipment Capital Come in Handy For Your Business?

Now that we know the different options for financing your equipment, we thought we would touch on how gaining equipment capital can actually benefit your business in the long term. Apart from the fact you are investing in new equipment to keep your company running, it actually has several more advantages.

It can increase your working capital

When you opt to finance or lease your equipment, you do away with the hefty up-front payment of actually buying the equipment that you need. Making a large purchase like equipment will take a dip into the working capital and cash flow that your company needs to continue running. 

The fact is, and as COVID-19 has proven, you simply never know what is around the next financial corner, and having solid working capital available means that as a business owner, you can have funds available for operating costs as well as in an economic dip. 

You can stay up-to-date with the latest equipment

Let’s face it. Technology is evolving quicker than we can keep track of. Every single year there is an upgrade or a new addition to something that you are using, and in most industries, having the new technology and upgrade can mean getting quicker results more effectively and more efficiently. 

Having the financing option available means having access to new technology and equipment easier than buying equipment that takes a huge chunk of capital each time you make a purchase. 

There are huge tax benefits for financing your equipment

Keep in mind that when you take financing on something like equipment, the interest that you pay is tax-deductible. This means that you can write off a portion of your payment for your equipment when you submit your tax report.

What is more, should you be leasing the equipment, you can go as far as to write off the entire lease payment as a business expense, not just the interest paid as this is tax-deductible. The entire amount paid fo the equipment can be written off by deducting the monthly lease payments on the annual tax report.

Easy application process

Lastly, one of the key benefits of sourcing capital for your equipment is the ease of the application process. 

In most cases, approvals take around 24 hours and the process can be done online. The application takes around five minutes to fill out and once terms have been agreed upon, the equipment can be picked up and the finances will be left in the hands of the team. 

Wrapping Up 

The advantages of getting finance for your equipment are very clear. Not only is it efficient and easy to do, but it can assist with business continuation, especially during difficult times like COVID-19. Whether you are a new company or a start-up, equipment capital financing options are certainly available to keep you in business.