Which is right for You?
Equipment financing represents a major segment of several industries: Construction, Transportation, Utility, and even IT. If you operate a business in one of these sectors it is likely that you will opt to finance equipment at some point (perhaps multiple times).
There are two categories of equipment lenders: Private and Conventional. Private lenders are structured in many different forms, such as hedge funds, independent investor groups, private portfolios, and wholly owned subsidiaries. Conventional lenders are banks or credit unions.
Let’s examine the benefits and risks of each type of lender. First, let’s look at conventional lending. Conventional lending offers you protection, as the FDIC guarantees your loan will transfer to a new lender should your current lender become insolvent. Another advantage is cost. Banks generally have a low cost of capital and restrictions on lending spreads so you receive a competitive interest rate. They also offer the opportunity for a comprehensive financial relationship including deposits, CRE loans, and lines of credit in addition to equipment loans. That possibly gives you more flexibility to fund growth or acquisitions.
There are potential drawbacks to applying with a conventional lender. All loans usually go through a committee, so your loan application is reviewed by an originator, an underwriter, and then the committee. The process can be cumbersome and somewhat lengthy – so you need to apply well ahead of when you’re going to need the equipment. Also, banks have strict lending parameters they adhere to, primarily because regulation requires it. If you’ve had any credit hiccups or recent temporary financial stress you may not qualify for the loan. The regulators sometimes also decide that lenders are too exposed in a certain area of their portfolio, forcing the lender to tighten their requirements further, which can disqualify you as well.
Private lenders have more freedom with their lending practices. While they are not completely exempt from lending laws, many regulations written for banks do not affect private lenders. They can offer speed, as most have a focused point of approval/denial within their organization (no committees). If you need the equipment quickly they can accommodate you. Their requirements tend to include a larger pool of applicants, as they do not have regulators examining their portfolio. So not qualifying at a conventional lender does not exclude you from qualifying with a private lender. Private lenders sometimes specialize in certain types of equipment. Expansion involving further purchases of same or similar equipment with the lender is rapid, with minimal underwriting requirements, since you’re already a customer.
The most prominent issue with borrowing from a private lender is cost. It’s investor money and investors look for an investment level return, so interest rates are going to be higher than conventional rates. You have to weigh that additional cost against the revenue generated by the equipment as well as the importance of benefits offered by private lenders. Another potential drawback is that many private lenders are collateral based, and will protect themselves regarding equipment value against the amount lent, so a significant down payment may be required.
Both private lenders and conventional lenders offer financing benefits. You have to examine every aspect of a purchase, determine your priorities, and match those up with an appropriate lender.