Overall, businesses require various types of equipment in order to function. Whether it is buildings, furniture, vehicles, computers, or manufacturing equipment, banks provide many different types of equipment financing and leasing arrangements to companies. Banks that are in the business of equipment financing provide money to businesses in exchange for an interest in the property purchased with the loan. This means that in the event the business is unable to make payments on the loan, the bank can obtain title to the property and sell it to repay the balance of the loan.
In the United States, 72 percent of companies use some form of financing to acquire equipment. Financing takes the form of leases, loans, and lines of credit. On average, American government entities, businesses, and nonprofits invest roughly $1.5 trillion in equipment, software, and facilities. Roughly $900 billion is financed by banks and lending institutions.
Although most industries typically involve some form of financing, certain industries tend to take out more equipment loans than others. For example, construction and agriculture must use many different types of machinery to operate their businesses, and they generally require large plots of land. Other areas that frequently obtain equipment financing include transportation, rail cars, IT equipment and software, aircraft, medical technology and equipment, maritime shipping, and mining. Virtually any type of business may apply for an equipment financing loan, including golf courses, law firms, hospitals, and private schools. Leasing arrangements are a good option for businesses that need specific equipment for a short period of time. Leases also provide protection from the depreciation of equipment, or the loss in value that results when equipment is rendered obsolete by new technologies and developments.
The terms of a financing agreement are similar to a securitized mortgage. A bank will provide the money needed to purchase the equipment or buildings in exchange for an agreement from the buyer that the asset will serve as a security for the loan. This agreement typically includes a provision that entitles the bank to take possession of the equipment in the event the company cannot make payments on the loan. The bank will typically then sell the equipment or building in order to pay off the balance of the loan. This is known as repossession or foreclosure.
Financing agreements can include a wide variety of terms. Some of the most common components of a financing agreement include the term of the loan, interest rates, prepayment penalties, and foreclosure proceedings. Most loans in the United States are fixed-rate, which means that the amount of interest the borrower must repay over the lifetime of the loan remains the same. Some loans impose variable interest rates, which means that the interest rate fluctuates over time, typically according to predetermined intervals.
There are some tax options that apply to equipment leasing and financing. For example, Tax Code Section 179 entitles a company to make a deduction for new and used equipment up to $25,000, including equipment purchased according to a lease or financing agreement. This provision is intended to help businesses build their inventory and increase their capital.