An equipment finance agreement (EFA) is like a loan, security agreement, and promissory note all packaged together into a single document. EFAs also contain some unique features that make them one of the most popular and versatile equipment financing options.
In this article, we’ll provide an in-depth overview of equipment financing agreements, including how they work, how they’re different than equipment leasing, their advantages, and how to get one.
It’s easy to confuse an EFA with a simple interest loan, since these two financing options look very similar from the financing applicant’s point of view. However, EFAs contain some unique provisions that make them more like a blend of a loan and a lease.
An EFA is like a loan because it creates ownership of the equipment: you get the financing up-front and purchase the equipment outright, then pay back the financing over time. The equipment shows up on your business’ balance sheet as an asset.
With a traditional loan, you’ll receive stated interest rates in your loan agreement, and when you get a balance statement, you’ll see it broken down into principal and interest. EFAs don’t work this way. Instead of interest rates, EFAs have finance charges, which are rolled into fixed payments that you’ll make on a regular basis (usually monthly). These fixed payments will last for the life of the financing term. So, during the repayment process, an EFA works more like a lease agreement than a loan.
In some ways, an EFA is more flexible than a simple interest loan. If you get an EFA with a financing term of 36 months, for example, you’ll need to make 36 equal monthly payments.
EFAs have some distinct advantages compared to bank loans. When you get a simple interest loan from a bank, the bank will require collateral. Often, they’ll apply a lien to other assets as collateral for the loan. With an EFA, your financing partner has a security interest in the equipment itself, so you often won’t need any additional collateral — the financed equipment serves as the collateral.
A bank loan also may have variable interest rates that are tied to market rates, which involves more risk and uncertainty. If the market rate goes up over the term of your loan, then so will your financing interest rate.
Finally, banks don’t have the flexibility of other types of lenders since they operate in such a highly regulated space. As a result, bank loans often contain loan covenants with restrictive provisions that will require your business to maintain a certain debt service coverage ratio. This type of covenant can make it difficult for your business to borrow money until the loan is fully paid off. If you violate the loan covenant, the bank may demand that you pay the full outstanding balance on the loan.
Equipment financing solutions, including EFAs, are extremely popular with small business owners. According to the Equipment Financing and Leasing Association, 79% of companies in the United States use some form of financing when acquiring equipment. Some of the reasons that business owners love equipment financing include:
Usually, to answer this question, you should ask yourself three follow-up questions:
1. What Type of Equipment Am I Financing?
If the equipment you want to acquire will hold its value and stay in use for many years, then you probably want to own that equipment. An EFA makes a lot of sense in these situations.
On the other hand, if the equipment will need frequent upgrades or go obsolete in several years (example: computers), then owning the equipment doesn’t offer a lot of upsides. An operating lease is usually the best financing option for these types of equipment.
2. Do I Need 100 Percent Financing?
EFAs are a great option when you want to own the equipment and need financing for the full cost of the equipment. If your business has cash available for a down payment, your financing partner should be able to use that to reduce your payments or the length of the financing term.
If you don’t need anything close to 100 percent financing, then you may want to consider a simple interest loan.
3. Do I Have Any Unique Financial Considerations?
One of the biggest advantages of EFAs is their flexibility. If your business has unique needs, such as season cash flow fluctuations that are specific to your industry, then your financing partner should be able to tailor a payment structure around these requirements.
To get an EFA, you’ll want to find an independent financing partner who understands your business and can customize your financing terms based on your unique needs. At Team Financial Group, we get to know your business so we can work with you to adjust financing terms and amounts. We offer fast, flexible financing and can frequently deliver same-day approval and financing.
Ready to get started? Applying is easy! Just visit our application page, fill out your contact information, and one of our commercial financing experts will get in touch to help walk you through the application process and determine which option is right for you.
If you have questions or concerns you want to address before you begin the application process, we can help. Get in touch with us by calling (855) 553-2735 or by filling out our convenient online contact form.
Industry overview. (n.d.). Equipment Leasing and Finance Association. Retrieved from https://www.elfaonline.org/about/industry-overview
The content provided here is for informational purposes only. For financial advice, please contact our commercial financing experts.