Every business needs some kind of equipment to operate and grow, but the price of some items can easily top six figures. That’s where equipment finance comes in: a company can get a loan or lease for almost any type of physical equipment, apart from real estate.
As equipment-dependent industries grow, so does equipment financing. Although it’s not mainstream yet, you can invest in equipment financing as an alternative investment. Let’s look at how it works, and the potential benefits and risks involved.
There are four main types of finance a company can choose from:
A term loan is similar to a mortgage: it lets a company pay in installments to own an item. This is usually done as a lump sum upfront, followed by regular payments until the loan – plus any interest – is paid off in full.
An operating lease lets a company rent an item from a lender over a set time for a fee. The lender remains the owner and is responsible for the item’s upkeep.
A finance lease is similar to an operating lease, but the company renting the item is responsible for its upkeep. It’s usually a longer, fixed contract where the company has the option to buy the item at the end.
This can be either a lease or a loan, usually used in niche industries where the lender has expert knowledge of the specific equipment.
It depends on how long they need the asset for, and whether they want to own it. Generally, a loan makes more sense if the company has enough cash for a down payment and plans to keep the asset for a longer time. A lease works better if there’s a chance the item will become outdated.
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For cash-strapped business owners, paying for equipment over time lets them keep some money for when they need it. That flexibility means they can expand or test out new business ideas. Another benefit is protection from equipment prices going up due to inflation. It also gives companies tax benefits and helps them access other lines of credit. It’s no surprise that equipment financing is popular with heavy industries like oil and gas, construction and healthcare.
When you invest in equipment financing you take on the role of the lender, which carries a few benefits. First, you’ll receive interest on top of any loan repayments. Second, similarly to bonds, equipment finance has steady returns – but they’re usually higher. Third, as an alternative investment, it also helps you diversify your portfolio. Equipment finance demand goes up when interest rates rise because business owners want to avoid big outgoings in an uncertain economy.
There’s always the risk that the business can’t make its payments, but in that situation you could use the equipment itself as collateral. There’s also the chance that if technology changes it could make the equipment obsolete, causing its value to drop.
Equipment financing returns are influenced by interest rates, the borrowing business’ credit rating, and term length to name a few factors.
Interest rates and the borrower’s credit rating can impact your investment value. When interest rates go up, the value of your investment goes down and vice versa. Borrowers with lower credit ratings are riskier so you’d get higher interest to compensate for lending to them, and lower interest for less risky borrowers. And the longer the term, the more you can expect to make.
The global equipment finance industry is a trillion-dollar market and the Asian healthcare sector is one of the fastest growing spaces. Hedonova specializes in leasing expensive equipment like MRI machines, CT/Pet Scan Machines, robotic surgical arms, or other medical equipment to hospitals in Asia. It finances new equipment and receives a monthly lease in return. Generally, default rates are low at 0.05%, while the payback period of the equipment cost is 10 months. Hedonova also benefits from depreciation tax benefits and government subsidies through offering this finance.
This guide was produced by Finimize in partnership with Hedonova.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.