Entrepreneurship, Second Edition

11.11. Equipment Financing

Capital equipment is often financed by intermediate-term funds. These may be straightforward term loans, usually secured by the equipment itself. Both banks and finance companies make equipment loans of this type. The nonbank companies charge considerably higher interest rates; they are used primarily by smaller companies that find themselves unable to qualify for bank term loans. As with other types of secured loans, the lender will evaluate the quality of the collateral and advance a percentage of the market value. In determining the repayment schedule, the lender ensures that the value of the equipment exceeds the loan balance. In addition, the loan repayment schedule is often made to coincide with the depreciation schedule of the equipment.

One further form of equipment financing is the conditional sales contract, which normally covers between two and five years. The buyer agrees to buy a piece of equipment by installment payments over a period of years. During this time, the buyer has the use of the equipment, but the seller retains title until the payments have been completed. Companies unable to find credit from any other source may be able to buy equipment on these terms. The lender's risk is small because it can repossess the equipment at any time if the borrower misses an installment. Equipment distributors who sell equipment under conditional sales contracts often sell the contract to a bank or finance company, in which case the transaction ...