Facts About Machinery Finance

Most of the businesses require machinery to operate and earn money. Each business must make a best choice based on factors such as cash flow, impact on balance sheet, credit line availability, to remain competitive. For both large and small businesses, machinery finance is a key part of asset acquisition. About 90% of U.S. businesses use some type of machinery finance to fund their operations. It is the most important way for businesses to invest in a capital while managing balance sheets and cash flow.

Machinery Finance

Types of Machinery Finance

The most common types of machinery finance are: Leasing or Commercial loans.

Leasing: It is one of the most popular for machinery finance. It offers flexible choices that can work with diverse objectives for businesses. A lease is an agreement where one party who owns a machinery, transfers possession and use that equipment for another party. In exchange for the use of the equipment, a rent is paid over a term of lease. Typically, 100% of machinery acquisition cost is financed.

Commercial loan: It refers to an agreement where a lender (bank or financial institutions) finances the acquisition of equipment. Lenders normally finance up to 75% of the equipment cost. Loan is fulfilled once the borrower repays both, principal and interest. At the end of the term, borrower owns the rights of machinery.

Other types of Machinery Finance

• Medical technology and machinery
• Agricultural machinery
• Business, office and retail machinery
• Construction and off-road machinery
• IT software and machinery
• Mining and Manufacturing machinery
• Trucks and transportation

Machinery Finance 101

Down Payment of finance usually requires up to 20% or more. A lease normally finances 100% of the machinery.  Interest Rates are structured with fixed payments. Loans can be booked with variable or fixed rates.

Introduction to Machinery Financing

3 Comparing Loans & Leases with better structure.

Factors to keep in mind include knowing the length of time for which the machinery is needed are: -

1. Company’s tax structure

2. Flow of cash

3. Company’s capital requirements related to future growth

Payment Terms

Over a specific period, borrower repays funds along with an interest. Rent is paid with more flexibility by lease. Ownership Borrower holds legal title of the machinery.  Leaseholder may have a right to purchase the machinery at the end of a term.

Both loan and lease payments can be made monthly or periodical.

Positives of Equipment Finance

Small businesses to Fortune 100 enterprises can have an optional alternative with machinery finance.

Positives include:

1) 100% Financing – Users can finance the machinery with no down-payment.

2) Cash protection – Businesses can retain their working capital and use it for other areas of business, such as expansion, marketing or research and development.

3) Risk Management – Leasing helps moderate the insecurity of investing in a capital asset. Business increases efficiency saves costs.

 4) Management of Cash Flow–Cash flow is maintained with more surety by the financing equipment in making proper budget of the payment of rents.

5) Obsolescence Management – Businesses can acquire more and better machinery through technology upgrades programs.

 6) Bundled Costs – Certain finance structures allow finance the entire cost of the machine (installation, maintenance, training, etc.) into one payment.

Machinery Finance

What happens at the end of the lease?

For capital leases, leaseholder owns rights of the machinery at the end of a term. Whenever the original lease terms are fulfilled.

For operating leases, leaseholder has three options at the end of the initial lease period:

1) Continue to rent the machine for an indefinite period.

2) Purchase the machine at fair market value.

3) Return the machine.