What happens when a loan doesn’t give you the payment, flexibility, or speed you need to make your new equipment purchase? What if a lease also doesn’t quite make sense for your situation?
There’s another finance solution that may check all the boxes. Think of it as a loan that’s custom-tailored for equipment purchases: the Equipment Finance Agreement (EFA).
What is an EFA?
An EFA resembles a loan, but with some cool ‘lease’ aspects thrown in the mix. On paper, an EFA and lease look nearly identical. They both come with a set number of payments and are amortized similarly. (i.e. no breakdown between principal and interest).
However, unlike a lease, with an EFA you own the asset from Day 1. There is no buyout at the end of term, and the equipment is free and clear from any liens (security interest from the lender) when the last payment is made.
Let’s dive a little deeper into the differences between an EFA and lease…
When financing any asset, one key question will always arise:
“Do I technically own this equipment?”
Think about purchasing a vehicle. If you go to a dealership, get an auto loan, and drive the vehicle off the lot…you’re the owner of it. It’s the same story with an EFA. Once you sign the contract and receive the equipment, you’re the owner!
On the other hand, with a lease, the finance company is the technical owner of the equipment. Ownership transfers to you only when the agreement is paid off. This typically happens via a buyout option at the end of the term ($1 or 10% are most common).
When it comes to flexibility in financing, a lease is likely your best option. Terms, payments, tax perks, buyouts, and structure can all be tailored to your unique needs. Options exist for deferred payments, seasonal payment options, or little to no money down. (Here’s our current finance promotion.)
An EFA is also extremely versatile, but in different ways.
Like a lease, an EFA covers full, 100% financing in most cases. It also gives you a streamlined contract with immediate ownership and flexible payment options. This is unlike a loan where you’ll typically have considerable up-front costs (down payment, sales tax, shipping, install, etc.). This huge perk conserves capital (cash) for the business…which we all know is key in today’s environment!
Like a lease, an EFA is usually a quick process – often moving from application to purchase order within a business day! Private lenders (like Geneva) understand your equipment and industry and take into consideration how the equipment will benefit your business when issuing an approval. We can also take on a little more risk (meaning better terms and more approvals for you!) and make quicker decisions than traditional lenders can. EFA or lease, we’ll make the process fast and easy.
Ahh, taxes. Everyone’s favorite topic. Disclaimer: I am not a tax advisor or accountant. I’ll keep this brief and focus only on the good stuff: how you can save money come tax time!
EFAs, leases, and loans are all similar in that they can be structured to take advantage of accelerated tax savings via Section 179. With this deduction, you may be able to write off the entire cost of equipment in the year it was purchased and put into use. (With some limitations of course.) This post is an excellent primer on the subject!
So…how does an EFA differ from a loan?
A loan is typically amortized out with a breakdown between principal and interest. There’s a set interest rate, and you may be able to pay down the principal balance of the loan in different ways.
Conversely, an EFA is amortized like a lease. There’s no true interest rate. Instead, you have a total or annual finance charge. We’ll set up a fixed monthly payment that won’t differ from month 1 to month 60. You’re essentially paying down a total balance.
Another difference is the security interest of the lender. With most loans, if you default, you risk having to forfeit other business assets to settle the debt.
With an EFA, the only security interest in the agreement is the equipment itself. If you default, only that equipment can be repossessed. Nothing more.
When should you opt for an EFA, lease, or loan?
If the equipment experiences rapid changes in technology or requires frequent upgrade, a lease may be the best option for you. With it, you can take advantage of the end-of-term option to either purchase or upgrade and won’t be caught with obsolete equipment. In addition, if you’re looking for a long-term tax advantage and lower payment, leasing may be the ticket.
When you’re looking at a type of equipment that will likely hold its value for many years, or you want to own the equipment from the get-go, an Equipment Finance Agreement could be the way to go. With the EFA, you’ll lock in a set term and a fixed payment (protecting you from inflation), and you’ll own the asset right away.
Loans have a set interest rate and a payback schedule that differs from that of a lease or an EFA. This can be beneficial if you have both money to put down and the cash flow to make additional payments toward the principal balance. Just remember: with a loan you may have to put additional collateral on the line, which can be risky.
The bottom line…
Each business and every purchase is different. Do your research ahead of time and consult your equipment finance rep and accountant. Understanding your options will help you make the best financial decision for your needs and situation.
If you want to do a side-by-side comparison, we’d love crunch numbers on both our lease and EFA options to show you what you can expect with either route. Our team is here to ensure you have not only the best structure in place for this purchase, but that you set yourself up for long-term success.
The best interest of your business is the best interest of ours!
