Industrial Equipment Financing – Guide + Leasing from $10 Million
September 18, 2020
The term “industrial equipment” refers to machines and equipment used in industries. Companies use it to manufacture, process, compound, or produce products and other equipment. This includes jigs, dies, tools, robotic arms, and other devices needed to control, adjust, and operate the machines. In this article, we'll discuss financing industrial equipment with a price tag of over $10 million. Financing industrial equipment can be done through loans or leases, so we'll discuss both.
What is Industrial Equipment Finance?
Industrial equipment financing includes leasing and loan programs that manufacturers and others utilize to pay for industrial equipment. Moreover, industrial equipment helps to manufacture and design products and machinery on an industrial scale. Industrial equipment financing allows manufacturers to secure the output of industrial equipment without paying the full price for the equipment in cash. In this way, companies can save cash for other uses. Industrial equipment secures the loans and leases that finance its acquisition and use.
The Industrial Machinery/Equipment sector includes the following industry groups:
Engines & Turbines, Agricultural/Horticultural Machinery & Equipment, Construction, Mining & Material Handling, Metalworking Machinery & Equipment, Non-Metalworking Specialty Industrial Machinery, General Industrial Machinery & Equipment, Computer & Office Equipment, Refrigeration & Service Industry Machinery, Other Industrial & Commercial Equipment & Machinery, Automotive Manufacturers, and many more!
Leasing and Loans
Video: Equipment Financing – Loans and Leasing
How Asset America can help
Assets America® can provide unlimited industrial equipment financing starting at $10 million. We can arrange your lease or loan much faster and with less hassle than traditional financing sources. Contact us now at 206-622-3000 to learn more, or fill out the form below and we'll get back to you shortly.
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If you don't want to buy industrial equipment with cash, you must decide whether to borrow or lease, i.e., industrial equipment financing. Each has its pros and cons, but both allow you to stretch your payments over months or years. With industrial equipment leasing, you pay a monthly rental fee and keep or return the equipment at the end of the lease, usually with a buyout clause at the end of the lease. If you want to own the equipment, you can take out an industrial equipment loan. You bring the asset and liability on to your balance sheet, but you can keep the leased asset off the balance sheet. When you pay off the loan, you usually pay off the debt with no balloon payment.
Borrowing from banks and equipment finance companies
The biggest, and perhaps only, reason to borrow from a bank is that you may be able to get a cheaper loan. However, there are many disadvantages to borrowing from a bank, including:
Your loan application may not be approved. You will have to fill out a lot of tedious paperwork. The process may take several weeks or longer. You may have to pay sales tax upfront. You will be required to make a large down payment. Your credit limit may be adversely affected.
Borrowing from a bank lets you avoid many of these challenges. There's less paperwork, you're more likely to get approved faster, you may also need a smaller down payment, and it may not affect any other lines of credit. On the downside, an equipment loan may have higher payments than a lease and offer fewer tax savings.
Industrial Equipment Leasing
Leasing can be wise if your equipment is quickly becoming obsolete or you need to upgrade soon. In contrast, loans may be a better option for more stable equipment. It's hard to say whether leasing or borrowing is cheaper, as it depends on your situation. Run the numbers for both to see which option will save you money.
How do industrial equipment loans work?
Industrial equipment loans can be obtained from banks, alternative lending institutions like Assets America®, or manufacturers. All kinds of industrial machinery and equipment can be purchased with a loan. This includes manufacturing equipment, specialty equipment, and many other types of industrial equipment. Loans can be used for new purchases, refinancing, or replacing existing equipment.
Industrial equipment varies widely in price. You might need dyes that sell for $10,000 or giant CNC machines that cost over $10 million. The equipment can serve as collateral for the deal and be covered under a blanket UCC lien. If you have good credit (credit score 680 or higher), you can expect to pay interest rates between 6% and 16%. Down payments typically range from 5% to 20%. Loan terms can range from two to seven years or longer.
If you have poor credit, interest rates on industrial equipment loans can be as high as 30%. Unless your repayment period is short, it's hard to justify that high interest rate. Many borrowers want loan terms that align with the useful life of the equipment or the IRS payback period. The latter is the number of years you have to depreciate an asset according to IRS regulations. It's always a good idea to consult with an accountant or CPA to help evaluate such issues.
Whether machinery or equipment can serve as collateral depends on the situation. For example, highly customized machinery may be worth less after foreclosure if it cannot be resold due to its speciality. However, many utility equipment can serve as collateral and help lower interest rates on your loan.
SBA CDC/504 Loan
Your small business may qualify for an SBA CDC/504 Equipment Loan. In this process, the bank provides half of the loan. The remainder of the loan comes from a Certified Development Company (CDC). You pay a 10% down payment and the SBA guarantees the loan.
To avail this loan, you must meet the following conditions:
An active, for-profit business with the number of employees within the limits set by the SBA, with average after-tax net income of less than $5 million for the two years preceding the application and net worth of less than $15 million, creating or preserving jobs or advancing other public policy objectives.
The SBA limits the maximum loan amount to $20 million. Repayment terms range from 10 to 25 years, and interest rates range from 5% to 20%.
Depreciation
Depreciation is a non-cash expense. You write off the cost of a capital asset (such as industrial machinery and equipment) over a set number of years. This is called the payback period, which for industrial equipment is usually at least 5 years. Use the IRS tables to determine the exact payback period to use. Depreciation methods can be either straight-line or accelerated.
Costs over the asset's life cycle include insurance, interest, maintenance, incentives, options, and operating expenses. You deduct these expenses in the current year rather than depreciating them over the entire recovery period. Be aware of the Section 179 rules that allow you to expense capital assets in the first year of ownership. In 2020, you can expense $1.04 million in this manner using Section 179. If your equipment purchases in 2020 exceed $2.59 million, this option will no longer be available. On the plus side, you will receive 100% bonus depreciation on your 2020 equipment purchases.
Industrial Equipment Financing Requirements
The requirements for equipment leasing are less stringent than those for equipment leasing. The requirements include:
Credit Score: You need a credit score of at least 620. Length of existence: You must have been operating your business for at least one year. Cash Flow: Your capital costs must be low compared to your business revenue. Down Payment: Plan for a down payment of 0% to 30%.
Several negative events can cause a loan application to fail. These include collections, bankruptcy, foreclosures, fraud, and other financial missteps. Barring these missteps, lenders will consider all factors before offering you an interest rate. If you are willing to accept the offer, you will need to provide the following information:
Business checks marked “void.” Tax returns and financial statements (business and personal) Driver's license Recent bank statements Vendor invoices or estimates for equipment
Equipment Leasing and Loan FAQs
How do I know whether I should lease or loan my industrial equipment?
Compare your potential earnings with and without equipment and machinery. Purchase equipment only if you can justify the expenditure. Consider its contribution to the growth of your business versus the possibility of losing money on a bad investment.
What kind of industrial equipment does AAI finance?
We have financed industrial equipment totaling over $10 million. Our terms are available to individuals and businesses with poor credit. We work with a network of private lenders, specialty funding sources, regional and national banks, and life insurance companies to help you get the industrial equipment financing you need.
Is it bad to take industrial equipment loan from a bank?
Banks may charge lower fees, but they will undoubtedly require more time and paperwork, a larger down payment, and very strict qualification standards. Unless you have excellent credit, an industrial equipment financing loan is more likely to be attainable than a bank loan.
What are the advantages and disadvantages of vendor industrial equipment financing?
The pros include convenience, low upfront costs, ease of upgrades, and very attractive deals. The cons are that some equipment may not be available or prices may be high for used equipment.