Equipment Loan Agreement

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
• Sale/Leaseback
• 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.

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.

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. Your 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.

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 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.

Your equipment funding agreement should also clarify if you’ll be allowed to make alterations or improvements to the equipment you’re accessing through the proceeds of the funding.

Some lenders might require borrowers to cover the cost of insurance for any equipment they access through equipment funding. As such, your equipment funding agreement should address whether or not your lender will require this investment on your part.

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.

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.