No matter what type of business you own and operate, there’s almost undoubtedly some kind of equipment you utilize, if not numerous types. From salons and home bakeries to those in agriculture, laboratories, and freelancing, equipment is a necessity, making equipment financing a great option. It’s what helps your business operate and significantly contributes to its success.
Unfortunately, for many small businesses in Canada, equipment is not something everyone has funding for. This is when equipment loans are considered. When it comes to business financing, equipment loans in Canada are on the rise as more companies look to grow and expand. If your business needs equipment to operate, chances are high you’re looking into capital loans or some other form of machinery financing.
In today’s blog, the team at Bizfund shares what we know about how Canadian entrepreneurs can utilize equipment financing. Read on to learn more about this type of funding, including how it works, available loan options, and tips for securing one and managing repayments.
What is Equipment Financing?
Equipment financing is a type of loan. It comes in various forms, enabling you to access funding to lease or purchase tangible, long-term assets.
Often, these assets can include everything from robotic systems, hardware, and production line machinery to automated equipment, lab materials, commercial vehicles, and more. Many businesses find that investing in equipment financing benefits their business by boosting productivity, replacing manual labour, and cutting costs.
However, when it comes to eligibility for equipment loans in Canada, requirements can vary, and not every business qualifies for every loan type. In most cases, to generally qualify, you need to have a registered company. You also need to have a strong credit history and the necessary documentation. Additionally, you may need to explain how the financing will be used and why your business is deserving.
Loan Options for Entrepreneurs
You now have a better understanding of equipment loans in Canada, along with the associated eligibility requirements. With this in mind, it’s a good idea to learn about options. Below, we’ve shared a few loan options entrepreneurs can apply for to secure machinery funding. It’s important to know that for large equipment, you can use one or more of the loan types:
Equipment Loan
The obvious first choice for entrepreneurs needing machinery funding is an equipment loan. These loans are typically secured loans. This means that a lender can seize your equipment if you fail to make payments.
Additionally, with equipment loans in Canada, you usually receive extra funds to cover additional costs that may arise with equipment purchases. For instance, if you go through BDC, you can receive up to 125% of the upfront equipment cost. This allows you to cover any additional expenses, such as shipping, transportation, training, or installation.
You should also know that many banks in Canada offer principal postponements. This means that for the first two years, you could potentially delay payments on the equipment loan.
Working Capital Loan
One of the ways to secure equipment financing is to apply for capital loans. A working capital loan, or a ‘cash flow’ loan, is a short-term business financing option. These loans can be used to finance your daily operations.
For example, you can use it to fund everything from inventory and marketing to salaries and less expensive pieces of equipment. That’s why many use it as a type of equipment loan. Typically, you have between six and 12 years to repay.
Vendor Financing
With this loan, you’re borrowing from a vendor to purchase their products, meaning you can buy goods without paying up front. You can also structure the vendor financing as debt or equity financing.
If you want fast, convenient, and lower upfront funding costs when purchasing equipment for entrepreneurial efforts, consider vendor financing. Yet, know that this type of funding offers a shorter repayment term and often less flexibility. This is especially true compared to traditional loan terms.
Merchant Cash Advance
Another avenue open to small businesses in need of equipment quickly is a merchant cash advance. Although not technically a loan, this form of funding can be used for equipment financing. It offers a fast and far more flexible option to traditional loans, but it can be more expensive.
With a merchant cash advance, you won’t use equipment as collateral. Instead, you’ll get an advance on future credit card sales that you will then have to pay back through a percentage of daily credit card transactions. Considering that no collateral is needed, it’s often an accessible option for entrepreneurs with less-than-perfect credit.
Government-Guaranteed Small Business Loan
At times, entrepreneurs may be able to access financing for equipment through government-guaranteed loans, such as the Canada Small Business Financing Program (CSBFP). With this option, the Canadian government shares the risk with participating financial institutions. This makes it easier for entrepreneurs to qualify.
Often, these loans allow you to borrow up to $1 million, and you can use up to $500,000 for equipment and leasehold improvements. For many, this type of machinery financing is beneficial, as it offers competitive interest rates and flexible repayment terms.
Tips for Securing Financing
The reality is that the equipment used can make or break a business. That’s why Canadian entrepreneurs need to follow a few tried-and-tested tips to secure financing. The right types will help you scale without draining your working capital.
Below, we’ve shared a few of the best tips you might want to follow. These should help improve your chances of approval for equipment loans in Canada:
- Tip One: You need to define your business goals. A lender needs to see how the equipment will expand operations, improve efficiency, and increase revenue. You need to be able to show them a business plan indicating you’re a good investment.
- Tip Two: You must determine your credit standing, including both personal and business credit. Your credit scores matter because the better your scores, the higher the chance you’ll qualify for better rates.
- Tip Three: Research various financing options and compare them to find the best fit for your needs. There are specialized equipment loans and other loan types you can try, as you know. Take a look at the offerings from credit unions, traditional banks, and alternative lenders, such as Bizfund. Also, be sure to consider fees, flexibility, and repayment terms before making a decision.
- Tip Four: To demonstrate to lenders that you can manage your debt responsibly, it is essential to keep your finances organized. This means maintaining up-to-date cash flow forecasts, financial statements, and recent tax filings.
- Tip five: Try to put down a small down payment. Making a small upfront payment can demonstrate to lenders that you are a lower risk when financing equipment loans. Besides showing you’re lower risk, it can also help lower borrowing costs or even help you qualify for more financing.
Managing Repayment
Once your equipment loan is approved, the next step is to learn how to manage your repayment. You must maintain payments because they can have a significant influence on your long-term financial health.
Below are a few simple tips we recommend to help you stay on track:
- Try to automate your payments. If possible, set up automatic transfers for your equipment loan installments. This will help you never miss a due date. It should also strengthen your credit score while preventing late-fee penalties.
- Monitor cash flow and budget. You must closely monitor your business’s income and expenses, especially as an entrepreneur. By keeping a close eye on earnings, you can also adjust your spending to avoid financial strain if conditions with your business change.
- Pay more when you can. By paying more when you’re able, even with small additional payments, you can reduce the total interest you’ll pay. However, ensure that the lender allows extra payments without incurring any penalties.
H2: Key Takeaways on Equipment Loans In Canada
Several loans in Canada can be used to purchase equipment, as you are now aware. It will be up to you to decide which option best suits your needs. Luckily, you can choose between equipment loans, government-backed financing, vendor loans, working capital loans, or merchant cash advances. It will also be your responsibility to manage your repayments. But we hope the tips we shared surrounding this and securing financing are beneficial.
If you decide a merchant cash advance is what you need, then consider Bizfund. We offer entrepreneurs quick money between $10,000 and $300,000. We are also not as concerned with credit scores as other institutions. To learn more, you can contact us here or have a look at our merchant cash advance here to understand eligibility and what we offer.
