An equipment finance agreement (EFA) combines a loan, security agreement, and promissory note into a single document. EFAs also have some distinguishing characteristics that make them one of the most popular and versatile equipment financing options. In this article, we'll go over equipment financing agreements in detail, including how they work, how they differ from …
An equipment finance agreement (EFA) combines a loan, security agreement, and promissory
note into a single document. EFAs also have some distinguishing characteristics that make them
one of the most popular and versatile equipment financing options.
In this article, we’ll go over equipment financing agreements in detail, including how they work,
how they differ from equipment leasing, their benefits, and how to get one.
A Little Bit of Loan, a Little Bit of Lease
From the perspective of the financing applicant, an EFA and a simple interest loan are easily
confused. However, EFAs have some unique provisions that make them more like a hybrid of a
loan and a lease.
An EFA is similar to a loan in that it creates ownership of the equipment: you receive the
financing up front and purchase the equipment outright, then repay the financing over time.
The equipment is recorded as an asset on your company’s balance sheet.
A traditional loan will have stated interest rates in your loan agreement, and your balance
statement will be broken down into principal and interest. This is not how EFAs work. EFAs have
finance charges instead of interest rates, which are rolled into fixed payments that you will
make on a regular basis (usually monthly). These fixed payments will be made for the duration
of the loan. As a result, during the repayment period, an EFA functions more like a lease
agreement than a loan.
An EFA is more adaptable than a simple interest loan in some ways. If you obtain an EFA with a
financing term of 36 months, you will be required to make 36 equal monthly payments.
What Is the Difference Between an EFA and a Bank Loan?
When compared to bank loans, EFAs have several distinct advantages. A bank will require
collateral if you obtain a simple interest loan. As collateral for the loan, they will frequently place a lien on other assets. Because your financing partner has a security interest in the equipment itself with an EFA, you may not need any additional collateral — the financed
equipment serves as the collateral.
A bank loan may also have variable interest rates tied to market rates, which adds risk and
uncertainty. If the market rate rises during the term of your loan, your financing interest rate
will rise as well.
Finally, because banks operate in such a highly regulated environment, they lack the flexibility
of other types of lenders. As a result, bank loans frequently include loan covenants with
restrictive provisions requiring your company to maintain a certain debt service coverage ratio.
This type of covenant can make borrowing money difficult for your company until the loan is
fully paid off. If you violate the loan covenant, the bank may demand that you repay the entire
loan balance.
What Are the Advantages of an EFA?
Equipment financing solutions, such as EFAs, are very popular among small business owners.
According to the Equipment Financing and Leasing Association, 79% of US businesses use some
form of financing when purchasing equipment. Equipment financing is popular among business
owners for a variety of reasons, including:
- Preserves cash flow: Paying for costly equipment up-front can lead to cash flow constraints. Financing can free up your business’ financial reserves and give you flexibility.
- Sound investment: Equipment financing lets you make a practical, reliable long-term
investment in the health of your business. - Helps keep equipment up to date: It’s easy to put off equipment purchases and
upgrades when you have to pay for them up-front. But once you get behind, it’s easy to
stay behind, and older and outdated equipment carries a higher risk of breaking down
or failing. Financing lets you keep your equipment updated so your business can run
smoothly. - 100 percent financing: In many cases, businesses can get complete financing for the
equipment they need with no down payment. Your financing partner may also be able
to roll some of the related costs for the equipment, like shipping, installation, and
training, into your EFA. - Speed, flexibility, and convenience: If you work with an independent financing partner,
they should be able to tailor the terms of your EFA to your business’ unique needs and
get you the financing quickly — often in a matter of days. At Team Financial Group, we
are frequently able to provide same-day financing for customers. - Tax advantages: An EFA enables your business to receive Section 179 benefits and claim
bonus depreciation in the same year you acquire the equipment.
Is it better to get an EFA, a loan, or a lease?
To answer this question, you should usually ask yourself three follow-up questions:
1. What kind of equipment do I want to finance?
If the equipment you want to buy will hold its value and be useful for many years, you should
probably buy it. In these cases, an EFA makes a lot of sense.
On the other hand, if the equipment will require frequent upgrades or will become obsolete in
a few years (for example, computers), then owning the equipment does not provide many
benefits. For this type of equipment, an operating lease is usually the best financing option.
2. Do I require 100% financing?
EFAs are an excellent choice when you want to own the equipment but require financing for
the entire cost of the equipment. If your company has cash on hand for a down payment, your
financing partner should be able to use it to lower your payments or extend the term of the
loan.
If you don’t require anything close to 100% financing, you might want to consider a simple
interest loan.
3. Do I have any special financial concerns?
One of the most significant advantages of EFAs is their adaptability. If your company has
specific needs, such as seasonal cash flow fluctuations in your industry, your financing partner
should be able to tailor a payment structure to meet these needs.
How Do I Obtain an EFA?
To obtain an EFA, you should seek out an independent financing partner who understands your
business and can tailor your financing terms to your specific requirements. We get to know
your company so that we can work with you to adjust financing terms and amounts. We
provide quick, flexible financing and frequently provide same-day approval and financing.
Are you ready to begin? Applying is simple! Simply visit our application page, enter your contact
information, and one of our commercial financing experts will contact you to assist you with the
application process and determining which option is best for you.
Astrum Capital Equipment Financing can assist you, if you have any questions or concerns before beginning the application process. Contact us by calling 888-202-1989 or filling out our simple online contact form.
