Equipment Loan Agreement: Your Step-by-Step Guide
Equipment Funding Agreement
Your Step-by-Step Guide
Here is your guide to understanding all that your equipment funding agreement entails.
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What You Need to Look For
An equipment funding agreement is a document that delineates all of the details of your equipment funding. Once you sign your equipment funding agreement, you are legally obligated to adhere to all the details that the lender included in the body of the document. Whether it’s a pesky fee hidden in the fine print or an overarching legal intricacy about how you can handle your equipment, each detail in your equipment funding agreement is important to parse through.
As you review your equipment funding agreement, you’ll need to check and confirm the following details:
- 1. Type of equipment funding
- 2. Ownership
- 3. Funding amount
- 4. Repayment term
- 5. Repayment schedule
- 6. Cost of Working Capital, APR, and total cost
- 7. Prepayment penalties
- 8. Penalty fees
- 9. Maintenance costs
- 10. Alterations or improvements
- 11. Insurance
- 12. Definition of default
- 13. Variable vs. Fixed interest
- 14. Miscellaneous fees
To be sure, whether you consult sample Business Funding agreements, equipment funding agreement templates, this guide to equipment funding agreements, or all of the above, it’s prudent to seek oversite from a legal professional before you sign onto your equipment funding debt.
Nonetheless, it certainly helps to get an overview of equipment funding agreements before taking your questions to your lender and/or lawyer. Here is your guide to reading over—and understanding—your equipment funding agreement.
Equipment Funding Agreement: 14 Details to Check Before Signing
Before anything, you need to check in on the tenants of your equipment funding agreement. Diving into the fine print on your this type of Business Funding agreement is important, sure, but the following basics are the first things you’ll need to check up on.
Do they match the features of the Business Funding that you discussed with your lender? Or are there discrepancies between what you see on your equipment funding agreement and what you were lead to expect of your equipment funding?
Here are the first six things you need to pore over in your equipment funding agreement.
The Type of Equipment Funding
First, you’ll need to make sure that you’re signing onto the type of equipment funding that you think you are. The type of equipment funding you’re signing on to should be clear in the body of your equipment funding agreement. Plus, you should be familiar with what the name of your equipment funding type actually means what you think it does. First, you’ll need to verify whether or not you’re leasing or financing your equipment. Alternatively, in some cases, your equipment funding might be a mix of both leasing and financing, so be sure to keep an eye on terminology within your equipment funding agreement.
There are many types of equipment funding out there, each with varying ownership and buy-out structures. Here are the five most common forms of equipment funding that you might be taking on when you sign your equipment funding agreements:
- Finance lease/$1 buyout
- True lease/operating lease
- PUT option lease
Whatever type of equipment funding you’re considering taking on, the structure will have serious implications on ownership and payback schedule. So, be sure to read up on the type of equipment funding you’re about to take on before signing your equipment funding.
Who Owns the Equipment
You should make sure you’re clear on who will actually, legally own the equipment you’re about to finance. In some cases, your lender will be the formal owner of the equipment you’re financing, which will have distinct financial and legal repercussions. For instance, if the lender owns the equipment, you might not be able to alter it. On the other hand, if you’re the formal owner of the equipment, your equipment funding agreement might also require that you pay for insurance for the equipment.
It might seem obvious, but it’s worth emphasizing—the equipment funding amount is one of the most important things you’ll need to verify on your equipment funding agreement. Ensure that the funding amount on your equipment funding agreement is what you discussed with your lender. If there’s a discrepancy between the amount on your equipment funding agreement and the amount you discussed with the lender, then it’s certainly worth checking in with them about it.
Repayment Term Length
Many equipment funding providers say that their repayment term lengths will typically be the projected life span of the equipment in question. Because this is a pretty subjective measurement of time, t’s crucial to verify the actual length of your funding repayment terms before you sign your equipment funding agreement. Generally speaking, the longer your repayment term, the better—a lengthier repayment period will mean lower payment amounts.
However, if you’re hoping to pay as little interest as possible, then a shorter repayment term might be a better fit for you, even if it means that your scheduled payments might be more frequent and/or in higher amounts.
Contingent to your repayment term will be your payment schedule, which will be yet another crucial feature to verify in your equipment funding agreement. You payment schedule will determine how frequently you’ll need to make payments towards your debt, and in what size payments you’ll need to do so.
Whether your equipment funding agreement delineates a daily, weekly, biweekly, or monthly payment schedule, be sure you know what you’re signing onto.
Cost of Working Capital, APR, and Total Cost
There are many ways to measure how expensive your equipment funding will be, but three of the most common will be the cost of working capital and the APR attached to your equipment funding.
While the cost of working capital indicates how much interest you’ll accumulate on your equipment funding, the APR will indicate the total annual cost of your equipment funding. The total cost of your equipment funding will indicate the total amount of interest and fees you’ll have to pay on top of the principal funding amount that you borrowed.
Be sure to consult an equipment funding calculator to see all of the different ways to measure the cost of your equipment funding offer before you sign your equipment funding agreement.
Check your equipment funding agreement to see whether your equipment funding comes with prepayment incentives or prepayment penalties. If your equipment funding agreement cites prepayment penalties, then you won’t necessarily be able to save money on avoided interest if you pay down your debt ahead of schedule. If you take on a non-amortizing equipment funding, then you’ll be on the hook for the total amount owed, even if you’re able to pay down your debt early. This is how a prepayment penalty will typically look in practice.
Your lender might also tack on indeterminate fees called “Penalty Fees.” If they do charge penalty fees, then your lender should delineate in what circumstances and just how much in your equipment funding agreement.
Who will cover the costs of the upkeep your equipment might need? Your lender should use a section of your equipment funding agreement to address this question in case it comes up as you use and pay down your equipment.
Alterations or Improvements
Your equipment funding agreement should also clarify if you’ll be allowed to make alterations or improvements to the equipment you’re access through the proceeds of the funding.
Some lenders might require borrowers to cover the cost of insurance for any equipment they access through an equipment funding. As such, your equipment funding agreement should address whether or not your lender will require this investment on your part.
Definition of Default
Your equipment funding agreement should solidify how exactly your lender defines default. For instance, some lenders will take a single missed payment seriously. Meanwhile, other lenders might only declare activity default if you can’t pay down any of your debt. Ideally, no definition of default will apply to you as you pay back your equipment funding, but it’s prudent to know exactly what standard you’re being held to before you sign your equipment funding agreement.
Variable or Fixed cost of working capital
If your equipment funding comes with a fixed cost of working capital, then the cost of working capital won’t shift with the market throughout your repayment term length. Conversely, if your equipment funding comes with a variable cost of working capital, then the cost of working capital will fluctuate with the market throughout your repayment term.
Your equipment funding agreement will confirm which of these two types of cost of working capitals your equipment funding will carry.
Finally, as you finish out reading the fine print on your equipment funding agreement, be sure to keep a keen eye out for any other fees that your lender could hit you with.
Equipment Funding Agreement: Beware of Jargon
As you comb through the details of your equipment funding agreement, make sure to write down and research any lending jargon that you come across. Even if you’re fairly certain that you’re familiar with a concept that your equipment funding agreement mentions, be sure to do your research and ask your lender about it.
Much of the time, funding terminology will have a very specific meaning, so a general idea of its meaning can often be way off. Plus, the unending list of acronyms used in equipment funding agreements will require a bit of research. Keep vigilant with the vocabulary used in your equipment funding agreement as you comb through all of the numbers.
Your Equipment Funding Agreement Checklist
Now that we’ve made our way through all of the minutiae that you’ll need to check in on before you sign your equipment funding agreement, let’s condense everything into one summarizing checklist.
Granted, this list won’t be comprehensive for every equipment funding agreement—depending on what type of equipment funding and what type of lender you’re working with, you might need to check in on additional points in your equipment funding agreement.
That said, the following things are a great place to start while reviewing your equipment funding agreement before signing on:
- Ensure that you’re taking on the exact type of equipment funding you think you’re taking on.
- Whether it’s your lender, your company, or you, who technically owns the equipment in question should be clear in your equipment funding agree
- Verify your exact equipment funding amount.
- Verify the cost of working capital and total APR on your equipment funding.
- Double check your equipment funding repayment term length and payment schedule.
- Calculate and confirm the total cost of your equipment funding.
- Check the fine print in your equipment funding agreement for the following details:
- Prepayment penalties your lender might charge you for paying down your debt early
- Penalty fees and in what circumstance your lender might charge them
- Who will cover the maintenance costs for the equipment in question
- Whether you’ll be able to perform alterations or improvements on the equipment
- Whether you’ll be obligated to pay for insurance for the equipment
- How the equipment lender defines default in the equipment funding agreement
- Whether the equipment funding carries fixed or variable interest
- Any other miscellaneous fees your equipment lender might charge you
- Check in with your lender if you notice any discrepancies or have any questions before you sign your equipment funding agreement
Navigating Your Equipment Funding Agreement: The Bottom Line
As you pore over the details on your equipment funding agreements, it might be tough to decode all of the funding terminology and jargon. That said, the effort you put into parsing through your equipment funding agreement now will be very much worth it in the long run. Be sure to consult someone with legal experience when you come across something strange or incomprehensible in your equipment funding agreement, and follow up with your lender if any of the details are different from what you discussed with them. At the end of the day, you want to be familiar with all of the details that accompany any debt you take on.