Manufacturing equipment financing

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Page written by Chris Godfrey. Last reviewed on October 3, 2024. Next review due April 1, 2025.

Buying big-ticket manufacturing equipment such as conveyors, assemblers, ovens, presses, and packing systems can put a major dent in working capital. Instead, most Canadian manufacturers opt for equipment financing, using business loans and equipment leases to get the machinery they need without struggling to pay with cash.

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What is manufacturing financing?

Manufacturing financing is a type of lending that can be used to buy equipment and machinery for manufacturing businesses, or to borrow against the value of equipment that manufacturers already own. In the first instance, manufacturing financing can help you to purchase or lease new or used equipment. In the second instance, manufacturing financing can release cash from a previously illiquid asset – machinery and equipment that your business owns – to provide funds that you can use elsewhere.

Manufacturing finance comes in three basic varieties:

Business loans to buy manufacturing equipment.
Leasing is a long-term equipment rental agreement with the possibility of buying the machinery at contract end.
Asset finance allows you to borrow against the value of the manufacturing equipment you already own.

How manufacturing equipment financing can work for you?

Manufacturing equipment financing allows you to pay for the machinery you need over time instead of all at once. You use the equipment as you pay for the equipment whilst reducing pressure on your cash flow. Equipment financing can also give you added financial firepower, allowing your business to obtain better, more expensive machinery and technology than you may be able to afford if paying with cash.

Replace old equipment

Old equipment that is no longer fit for purpose because it’s either too slow, needs constant repair, or is incompatible with other modern systems, is a major drain on your manufacturing business. In an industry where every cent counts, best efficiency is crucial. Time lost is money lost. Upgrading or replacing your current equipment can make your business more profitable and provide more opportunity to grow.

Benefits of equipment leasing

With a lease, you’re not buying the equipment, you’re taking on a long-term rental. Depending on the type of lease you choose, (finance lease or operating lease), you may have the option to buy the construction equipment at contract end for a pre-agreed sum, (which could be as low as $1 but is typically the residual value of the equipment – which means what it’s worth in used condition).

Because you’re not repaying the whole cost of the equipment, leasing usually requires lower monthly payments than a business loan. You may also pay a smaller down payment – perhaps equal to one or two month’s repayment instalments.

If you choose not to buy the equipment at the end of the lease, (or you have chosen an operating lease that forbids it), the equipment goes back to the lender. You would then need to take out a new lease and obtain new equipment. (Which could allow you to obtain more modern and up to date machinery).

Some lessors (lenders) may give you the option to extend the lease if you prefer to keep the equipment but do not wish to pay the residual.

Advantages of leasing manufacturing equipment

Pay a lower monthly sum.
May pay a lower down payment.
Could allow you to obtain better and more expensive equipment than paying with cash.
No added collateral required.
May have the option to buy the equipment at contract end.
May be more tax efficient than a loan or paying with cash.

Disadvantages of leasing manufacturing equipment

May not own the equipment at contract end.
There may be restrictions on the types of equipment you can lease.

What are the benefits of equipment financing loans?

Although many types of business loans are suitable for buying manufacturing equipment, they all work to the same basic format: You borrow a sum of cash and then repay it over time. Interest charges and fees are added to the principal amount you borrow, and the lender may retain a lien on the equipment during the term of the loan. At contract end you’ve paid off the loan and you own the equipment outright.

Advantages of business loans to buy manufacturing equipment

Regular repayments can improve your financial planning.
You own the equipment at contract end.
Could allow you to buy better and a more expensive equipment than buying with cash.
May be more tax efficient that paying with cash.

Disadvantages of business loans to buy manufacturing equipment

Some loans may require added collateral or a personal guarantee.
Interest rates on some business loans can be high
At contract end the equipment may still need replacing or upgrading

What do I need to qualify for manufacturing equipment financing?

Although every lender will have their own qualifying criteria, some fundamental rules apply. In most cases, lenders will need to see:

At least six months trading history.
Regular revenue stream.
Good business and personal credit scores.
Enough surplus working capital to meet the loan/lease repayments.

You will also usually need to provide bank statements, tax returns and other financial documentation. However, even if your credit score is weak and/or you’ve been turned down elsewhere, it may still be possible to get the equipment financing you need. To find out if you qualify before you apply, contact Swoop to discuss your funding needs with a finance expert.

How to apply for manufacturing equipment financing?

Obtaining a manufacturing equipment loan or lease is no different to obtaining most other forms of business finance – preparation is key:

Identify your need for the loan. Why do you need the money? You must present a strong case for funding to secure equipment financing and your financial records must support this need, indicating how the loan will deliver your plan – and critically, how you will pay the loan back.
Check your personal and business credit scores. It is common for mistakes to occur on credit reports and incorrect information could have an adverse impact on your loan application. If there are errors, get them fixed before applying for finance – and be aware that fixing a credit score can take time and there are no ‘fast credit repairs’ despite the many promises from online ‘credit doctors’ who say they can perform miracles for your score.
Get your paperwork in order. Depending on the type of financing you apply for and how much money you need, lenders may need to see bank statements (at least 6 months), balance sheet, profit and loss statements, cashflow projections, list of debts, list of assets, customer database, documents that reveal the structure of your business (corporation, LLC, etc.), certificates of good standing, tax returns and more. As a rule of thumb, loans require more paperwork than leasing and the larger the sum you borrow, the more documentation the lender will ask to see.
Research and compare lender programs: Interest rates and fees for manufacturing equipment financing can vary significantly, so it makes sense to shop around before settling on a deal. You could do this by approaching banks, credit unions and online lenders one by one, or you can use the services of a loan marketplace that will introduce you to a choice of equipment loans from different lenders. Some marketplace platforms can also give you advice and help you with the application process. This can be especially useful for borrowers who have never taken out an equipment loan before.

Apply: Make sure you have provided all the necessary documentation and have answered any extra questions the lender may have. Once you’ve submitted your application it may be worth checking with the lender to be sure they have your package and to ask if there’s anything else they need. Keep in mind that some financial institutions – typically banks and credit unions – will take longer to review your application than online lenders, where you may get an approval in a matter of hours or even minutes.

Get started with Swoop

No matter if you’re seeking your first equipment loan or you’re a seasoned borrower, working with business finance experts can make all the difference when applying for funding. Contact Swoop to discuss your borrowing needs, get help with your application and to compare high-quality equipment financing deals from a choice of lenders. Give your manufacturing business the equipment it deserves. Register with Swoop today.

Written by

Chris Godfrey

Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Barclays Bank, Metro Bank, Wells Fargo, ABN Amro, Quidco, Legal and General, Inshur Zego, AIG, Met Life, State Farm, Direct Line, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of consumer and business finance and insurance.

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