Equipment Finance Perth is an essential aspect of business operations for at least a few reasons. First, the debt responsibility associated with equipment financing represents a significant financial commitment. When equipment is purchased to improve or increase an existing business, the actual equipment purchased represents the company’s tangible assets. As such, these assets must be financed to gain equity. This process of securing equipment financing involves a significant amount of risk.
There are several challenges involved in equipment financing for business owners. The most significant risk is that the equipment will not be sold or traded in its entirety and, therefore, will hurt the organization’s cash flow. Another considerable risk for equipment financing is that the equipment will not be sold or traded in as a complete transaction. Because many businesses purchase expensive equipment with an expiry date, this can result in a loss for the company. Depending on the type of equipment and the purpose for which it is purchased, there are also additional risks.
For example, if a business owner needs equipment to expand their business but cannot obtain new funding to fund this need, a simple equipment finance solution may be applied to achieve this goal. Typically, equipment finance refers to a loan or lease that a business owner can obtain to fund the cost of purchasing new equipment. This type of loan typically provides the ability for a business owner to pay for the necessary equipment over time, as long as the required payments have been made. For example, this may require that a business owner take out a one-time charge that covers all costs associated with acquiring the new equipment.
One of the advantages of equipment finance is that there are various financing options available from two types of sources: capital and lease financing. Capital financing typically includes a loan from a company that finances businesses. Equipment leases are offered by lessors, who usually offer repayment terms of fixed or variable interest rates. A lessor will make equipment available for purchase at a wholesale price after taking delivery. The price paid for the wholesale item may be lower than the price paid for the same thing at a retail outlet because the lessor marks down the wholesale price. Capital financing can be used for the short-term acquisition of necessary equipment or can be used to make purchases over the long term.
Lease financing is a more complicated financing solution due to the high risk of the investment. A lease often comes with several restrictions, including selling the equipment immediately and the need to use the equipment for a specific period. If the business owner decides to exercise an option to purchase the leased item, they will be required to provide the lessor with a large lump sum to cover the expense. Because of these factors, equipment financing loans are not ideal for businesses expecting significant increases in the amount of equipment that they need over a short period.
Financing can also be obtained through a traditional mortgage, but it is not always a possibility. Mortgage financing is most often obtained when the customer owns a valuable property that the lender will convert into cash. If the business is not making enough money, the property owner may not have sufficient funds to make a down payment on a new equipment loan. There are two basic types of lease structure – a line of credit and a lease with the option to buy. Depending on the situation, a different kind of financing may be required.
Line of credit equipment leasing requires a small cash outlay upfront, which must be paid each month until the total amount is paid off. This financing structure is not ideal for businesses that expect to make high-interest or recurring payments. Line of credit equipment leasing is beautiful to smaller firms. The primary advantage of this type of financing structure is that there is no need to compensate a third party. When equipment leasing runs out, the business only pays the initial payment, which is usually less than the total amount of the equipment payments still due. If the company expects to pay off the debt within a reasonably short period, then the equipment leasing payment makes a good choice for financing.
Lease with option to buy (also known as a lease with security} is a cash flow finance program. Unlike a line of credit, there is no cash flow required to maintain the financing. A business only needs to make the monthly payments to the lender until the total amount is paid off. Once the option to buy term expires, the company must return all remaining capital to the lender. Lease financing is an excellent choice for businesses that anticipate high-interest or long-term borrowing requirements but cannot meet those obligations due to cash flow problems.