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What is equipment refinancing?

December 14, 2017

Equipment and machinery used to operate a business is usually financed through a loan or a lease. Equipment financing allows businesses, which do not have cash up front, to purchase and use the equipment in the course of the business operations.

Business equipment can also be refinanced with certain lenders. Businesses have the option to refinance their equipment loans or leases in an effort to simplify or consolidate loans, reduce monthly payments by extending the term of the loan, lower interest costs, or to have access to cash that is needed to grow the business. Equipment refinancing is available to raise working capital for business which are equipment rich yet cash flow poor.

What is equipment refinancing?

Refinancing is simply financing an asset (equipment, machinery, etc.) with a new loan or lease that has a different interest rate and/or terms. Typically, it’s beneficial to refinance for a lower interest rate or an extended financing term which will lower the monthly payments. If a business has equity in the equipment, it can take out a loan and get cash now for the value of the equipment. The refinancing terms are impacted by the age of the equipment, the condition and appraised value at the time of refinancing as well as the financial condition of the company.

Refinancing equipment can also have beneficial tax impacts for the business. The monthly refinancing payments can result in a tax deduction depending on the terms. The terms of the loans should be discussed with your lender.

Sale leaseback

A sale leaseback is a form of equipment refinancing where the owner of an asset sells it to another party and leases it back from the purchaser. With a sale leaseback title actually passes to the buyer of the equipment. This is done by businesses to leverage the equipment and relieve some working capital for the business.  

Sale leaseback can also have tax impacts. Since title transfers during the sale of the equipment, the seller may need to record capital gains depending on the cost basis and fair market value. Also, the monthly payments made to the purchaser can qualify for a full tax deduction when paid.

Which businesses benefit most from equipment refinancing?

Equipment refinancing is great for businesses which are capital-intensive with expensive equipment and in need of cash. These businesses include construction companies, general contractors, dentist offices, and any other businesses that require expensive equipment to operate. For example, a construction company looking to upgrade their equipment, expand by purchasing additional equipment, or hire more employees, can refinance equipment that it already owns for additional cash.

Summary

Equipment refinancing offers business owners another way to obtain cash or lower monthly financing payments if additional working capital is needed. The lender and the owner of the asset will agree upon the terms. The terms of the refinancing can impact how the monthly payments are treated for tax purposes. When additional working capital is needed for a business, leveraging existing equipment can be a simple way to get the cash the business needs. 

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