If you need financing to afford a major equipment purchase for your business, you might assume that a small business loan from a traditional bank is going to be your best option to afford this purchase outright.
Given the specialized nature of equipment financing, though, loans from traditional lenders lack the flexibility and customization needed to match the value offered by equipment financing agreements (EFAs). While EFAs and business loans may look similar to the untrained eye, there are important differences your business should know before it sets out in search of financing.
Here’s a look at the key differences between equipment finance agreements versus loans.
Loans use an amortization schedule to break down the share of principle and interest paid off with each payment installment. EFAs use fixed monthly payments that are established in the terms of the agreement, making it easy for businesses to track their repayment progress.
These simplified monthly payments can offer some benefits when it comes to deducting the cost of equipment purchases on your business taxes. Talk to your accountant to find out how this depreciation can reduce your annual tax burden.
With a traditional business loan, the amount of interest you pay is determined by several factors, including how quickly you pay back the loan, the interest rate established at the start of the loan, and whether or not you’ve chosen a variable-rate loan that can adjust the interest rate owed over time.
EFAs only use interest rate calculations to determine a fair repayment amount for your financed purchase. Once the EFA is signed, both the lender and the business are locked into a fixed monthly payment amount that won’t ever change.
Traditional lenders typically secure any business loan through a lien on all of your business assets—which can significantly increase the risk of financing equipment or other essential purchases, in the event you’re unable to repay that debt.
This isn’t the case with an EFA, which uses your equipment as collateral to simplify the process of qualifying for a loan. This approach to securing funding is one reason EFA approvals are much more flexible and expedited compared to traditional loan product offerings.
A traditional bank or lender has loan approval processes that involve a lot of documentation and can stretch out across weeks. When you’re waiting on equipment to accelerate your own revenue generation and growth, this waiting period is unacceptable.
Thanks to the simple collateral and documentation requirements of an EFA, though, these agreements can be approved in as little as four hours after the application has been submitted. Ultimately, EFAs get your business the equipment it needs as quickly as possible, supporting your bottom line.
In the end, EFAs tend to close much faster than other types of business loans, providing funds quicker and enabling a faster start to the equipment manufacturing process. Because many EFAs don’t require a down payment, the process of delivering a secure payment is removed, facilitating faster funding while also preserving your cash reserves.
Traditional banks may be a familiar source of financing for your company, but they lack the specialized products that you need to meet your specific business needs. While EFAs and loans may look the same on the surface, an EFA offers key benefits that deliver better value, from your initial application through the end of the repayment period.
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