What is the difference between commercial equipment financing and a personal loan?

Commercial Equipment Financing:

Commercial equipment financing is designed specifically for businesses to purchase equipment or machinery needed for operations. This could include anything from office or shop fit outs and stock to industrial machinery and vehicles.

The primary goal is to enable businesses to acquire essential tools without bearing the full cost upfront.

 This type of financing is especially useful for businesses that require expensive equipment to function but may not have the immediate cash flow to make such large purchases outright.

Personal Loan:

A personal loan, on the other hand, is a more flexible form of borrowing that individuals can use for a variety of personal expenses. This could include consolidating debt, covering medical bills, funding home improvements, or even taking a vacation.

Personal loans are not tied to specific purchases and can be used at the borrower’s discretion. They are typically unsecured, meaning they do not require collateral, and are based on the borrower’s creditworthiness and income.

Commercial Equipment Financing:

One of the key characteristics of commercial equipment financing is that it is usually secured by the equipment being purchased. This means that the equipment itself serves as collateral for the loan.

If the business fails to make the payments, the lender can repossess the equipment to recover the outstanding amount. This security reduces the lender’s risk, often resulting in more favourable terms for the borrower, such as lower interest rates and longer repayment periods.

Personal Loan:

Personal loans are generally unsecured, which means they do not require any collateral. The lender relies on the borrower’s credit history and income to assess their ability to repay the loan.

Because of the higher risk to the lender, personal loans tend to have higher interest rates compared to secured loans. The repayment terms are usually shorter, typically ranging from one to seven years.

Commercial Equipment Financing:

The interest rates for commercial equipment financing can vary widely based on the type of equipment, the financial health of the business, and the terms of the loan.

However, because the loan is secured by the equipment, interest rates are often lower than those of unsecured personal loans.

Additionally, the repayment terms are typically longer, sometimes matching the useful life of the equipment, which can be several years.

Personal Loan:

Interest rates for personal loans are generally higher than for secured loans due to the increased risk for the lender. The rates are influenced by the borrower’s credit score, income, and overall financial profile.

Repayment terms are usually shorter, which means higher monthly payments compared to a similar amount borrowed through commercial equipment financing.

Commercial Equipment Financing:

The application process for commercial equipment financing can sometimes be easier than personal loans.

Many commercial Lenders have what they call ‘low doc’ options where as long as your ABN has been active for greater than 6 months, you will qualify for a lend. Low Docs do vary from lender to lender however, this isn’t always the cheapest option available. This is where you can benefit from using an experienced broker.

If your business has tax returns or financials readily available to support the application, many experienced finance brokers will use these to get you the best possible approval at the lowest interest rate available.

Personal Loan:

Applying for a personal loan is generally quicker and simpler. Borrowers need to provide proof of income, credit history, and personal identification.

Some lenders can offer instant approval and funding within a few days. The simplicity and speed make personal loans an attractive option for immediate and smaller financial needs.

Commercial Equipment Financing:

For businesses, commercial equipment financing can be a strategic move that preserves cash flow and working capital.

By spreading out the cost of expensive equipment over time, businesses can maintain liquidity for other operations. Successfully managing such financing can also help build the business’s credit profile, making it easier to secure future funding.

Personal Loan:

Personal loans can affect an individual’s credit score both positively and negatively. Timely repayments can improve the borrower’s credit score, while missed payments can damage it.

Since personal loans add to the overall debt load, they can impact the borrower’s debt-to-income ratio, which is a critical factor in future borrowing decisions.