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Access to reliable, up-to-date equipment is essential to keeping business operations running smoothly. But funding critical equipment replacements and upgrades can be challenging. Equipment financing can help businesses across industries, including agriculture, healthcare and transportation, invest in the tools they need to stay competitive while preserving working capital.
Understanding business equipment financing
Equipment financing is a type of loan or lease companies seek from financial institutions to access tools and machinery without having to purchase them in cash. Companies get the equipment they need to do business right away while making manageable payments over time.
Equipment financing is also versatile. It can fund purchases ranging from fleets of forklifts and service vehicles to large work boats and corporate aircraft.
Companies may consider equipment finance for small-dollar items such as laptops. But they typically find equipment financing attractive for larger purchases, starting at around $100,000, said David Feldser, East Region Sales Leader for Equipment Financing at J.P. Morgan.
“There are also the very large pieces of industrial equipment, things that are used in the manufacturing space. Those could be anywhere from $3 million, to $20 million,” Feldser said.
Benefits of equipment financing
Equipment financing can help business owners:
- Accelerate growth: Expanding into new markets, introducing new products or scaling to meet demand often requires investing in additional capacity. Equipment financing helps fund purchases that unlock growth.
- Preserve working capital: Using liquidity to pay for equipment upfront has opportunity costs. Financing equipment purchases lets companies use working capital for other needs or invest in strategic initiatives.
- Gain efficiency: New, high-quality equipment can increase process efficiencies, helping the company save on energy or increase productivity. “Those businesses can save and make more money than the interest they’re paying on the loan,” Feldser said. “Companies can get so much more out of what the asset can do for them than what the debt does.”
Our team can help you find the right strategies to meet your equipment needs. Talk to a commercial banker to learn more.
Comparing equipment financing options
There are two main varieties of equipment financing:
- Business equipment loans: With a business equipment loan, the company owns the equipment, while the lender holds a security interest through a lien, meaning the equipment serves as collateral until the loan is fully repaid. Once repaid, the lender removes the lien. Loans sometimes require a down payment. Borrowers typically pay back loans over a longer span of time—up to seven years, depending on the value of the asset.
- Business equipment leases: With a lease, the lessor owns the equipment until the lease expires, at which point the lessee can decide whether to return, purchase or extend the lease. There are many kinds of leases, including options that give the borrower an opportunity to buy the equipment once the lease ends.
When evaluating options to finance an equipment purchase, consider:
Value retention
The best choice often comes down to how well a company believes the equipment will retain value over time. Loans may make sense when a company can acquire an asset, pay it off and have equity in the equipment that lasts beyond the loan term, Feldser said.
For example, consider a construction company looking to obtain a crane. “That crane is going to last forever, and it holds its value really well, so the company will probably want to eventually own it,” Feldser said.
Leases can be a good option for equipment that companies don’t expect to retain value once the term is up, or equipment at risk of becoming obsolete. That way, the company can return outdated equipment to their lessor and lease a newer model.
Business model alignment
Leases might be a good fit when owning the equipment doesn’t support the company’s business model or long-term goals.
“If you’re a massive shipping company, your core competency is logistics, not managing equipment,” Feldser said. “So you say to yourself, ‘I have a better use for my funds than to buy those vehicle assets. I want to deploy that capital in other places so I just want to lease that equipment.’”
When owning equipment supports the company's business model, a loan may make more sense. For example, a construction company's model might include keeping equity in construction equipment and potentially selling it in the future.
“There’s a profit model in that, in addition to the construction work that they’re doing,” Feldser said. “The assets really do hold value for them.”
Choosing an equipment financing provider
After determining whether to lease or loan equipment, find a financing provider that will treat your business fairly, with a transparent approach to interest rates and fees.
Feldser also suggests looking for a provider that has—or is willing to establish—a relationship.
“Do they know your company?” he said. “Do they know what you do and how you make money?”
An equipment financing provider that understands your industry and your business’s broader needs and goals can help you navigate options to find your ideal financing strategy.
We’re here to help
Discover how J.P. Morgan’s team of bankers and specialists can help you stay competitive and preserve working capital with business equipment financing tailored to your needs.
JPMorgan Chase Bank, N.A. Member FDIC. Visit jpmorgan.com/commercial-banking/legal-disclaimer for disclosures and disclaimers related to this content.
