Equipment Financing for Farmers-Ranchers-EntrepreneursHow Do Equipment Finance Agreements Work?
An EFA, or Equipment Finance Agreement, is a type of business loan where the customer takes ownership of the equipment upfront, and then pays the lender monthly, annually or under a schedule agreed on by both parties. It's similar to financing a car.
Equipment finance agreements (EFAs) are similar to loans, but they aren’t traditional loans like we described above. With a finance agreement, your amortization schedule stays the same regardless of when you pay each month and how much you pay. Your equipment finance agreement won’t have stated interest rates, and the balance won’t break down into principal and interest. Instead, your finance charges will get calculated into the series of fixed payments you make over the term of the finance agreement.
Equipment financing is perfect for small business owners who have demonstrated success in the market and are trying to grow. Because of the generally quick approval times, many small businesses have been able to use equipment financing to maintain and expand their business operations on the fly.
Another benefit of equipment financing is that monthly payments on an equipment loan can be considered an operating expense. Make sure to discuss this with your lender and tax professional when going over the terms of the loan.
Overall, you can think of an EFA as a financing option that combines the ownership aspect of a loan with the financing structure of a lease. These agreements are often used to purchase assets that retain their value and equipment you plan to use long-term.
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How Do Equipment Finance Agreements Work?