An Equipment Finance Agreement (EFA) is a straightforward way for small business owners to finance the purchase of necessary equipment without paying the full price upfront. Here’s a detailed explanation of how an EFA works, tailored for small business owners:
1. Initial Steps
– Identify Equipment Needs: Determine the specific equipment your business needs. Choose a Vendor: Find the equipment and provide invoice.
– Apply: Apply with a reputable lender or loan broker lik Liberty Capital that offers EFAs. This could be a bank, a financial institution, or a specialized equipment financing company but not knowing who does what you might end up with a wrong loan.
– Get funded. We’ll fund the vendor, multiple vendor acceptable, and you make monthly payment via ACH as an auto pay. No more monthly invoice.
2. Application Process
– Submit Application: Depending on the funding size, programs like “APP-ONLY” up to $250K could be accessible without tax returns or financials. Provide your business information, financial statements, and details about the equipment you wish to finance.
– Credit Check: Liberty Capital will pull soft-inquiry to see which lender, program is suitable to save time. Your credit history and business financials will determine your approvability, rates and terms including what if any down payment might be needed.
3. Loan Approval
– Approval Notification: If approved, we’ll provide you a term-sheet detailing all the equipment loan details such amount, interest rate, buyouts, down payment, administration fees, repayment schedule, and any other terms.
– Electronic Agreement Signature: You will sign the EFA via electronic, which outlines all the terms and conditions, including the total amount financed, interest rate, repayment period, and monthly payment amount.
4. Acquisition of Equipment
– Vendor Payment: The lender pays the equipment vendor directly, so you don’t have to handle the large upfront cost. Delivery, installation and other fees might be added into funding.
– Equipment Delivery: The vendor delivers the equipment to your business. You start using the equipment right away.
– Deferral program: If you qualify for deferral program, your payment will be deferred up to 90 days.
– Down Payment: Structured transactions, bigger transactions might warrant down payment.
5. Repayment
– Monthly Payments: You make regular monthly payments to the lender as agreed in the EFA. These payments are typically fixed amounts and include both principal and interest. Typical term for equipment financing is about 5 years. If you want an accelerated term you can go as low as 24 months. The lower the term the lower the over all paybacks. Rates may vary per term.
– Interest and Principal: Each payment includes interest (the cost of borrowing the money) and a portion of the principal (the actual amount financed).
– Tax Deductibility: You might want consult with your CAP to determine which equipment loan program is suitable to you and your budget.
6. Asset Ownership
– Ownership Rights: You own the equipment from day one. This means you can claim depreciation on your taxes and have full control over the equipment’s use.
– Collateral: The equipment itself often serves as collateral for the loan. If you default on payments, the lender has the right to repossess the equipment. If you have lower credit, you might be required to put down payment or additional collateral to make the lender warm and fuzzy.
7. End of Loan Term
– Loan Payoff: Once all payments are made, the loan is paid off. There are no further obligations to the lender.
– Free and Clear Ownership: You retain full ownership of the equipment with no additional payments or conditions. Lender will file a UCC1 which becomes public information.
Benefits for Small Business Owners
- Preserve Cash Flow: By financing the equipment, you can preserve your cash for other operational expenses or investments.
- Fixed Payments: Knowing your exact monthly payment helps with budgeting and financial planning.
- Tax Advantages: You can potentially deduct interest payments and depreciate the equipment, reducing your taxable income.
- Immediate Use: Gain immediate access to the equipment needed to run or expand your business without waiting to save the full purchase amount.
How would Equipment Financing play out as a small business owner:
Suppose you own a small bakery and need a new commercial oven costing $20,000. Here’s how an EFA might work:
- Select the vendor: Once you’ve narrowed down the equipment. Lender will approved the vendor, amount and the equipment.
- Select a Lender: You find a lender that offers EFAs and has favorable terms for small businesses.
- Application and Approval: You apply for financing, and the lender approves your loan with a term of 5 years at an interest rate as low as 8%.
- Sign Agreement: You sign an EFA that specifies monthly payments of about $405.
- Receive Equipment: The lender pays the oven manufacturer, and you receive the oven.
- Make Payments: You make monthly payments of $405 for 5 years.
- Ownership: You own the oven from the start and can use it to bake more goods, increasing your revenue.
By understanding these steps and benefits, small business owners can make informed decisions about using an Equipment Finance Agreement to acquire essential business equipment.
As always, for over 20 years, Liberty Capital will always be there to guide our clients the right funding at the right time. We will not weigh the process down. We’ll make it smooth, painless and frictionless as possible.
Your success is our success.