In that article, I focused on the application process, and how much simpler it was. This time, I’m going to highlight some of the differences between an Equipment Finance Agreement (EFA) which is a loan agreement with an equipment finance company, vs. an Installment Loan Agreement, which is a typical loan agreement with a bank.
Difference #1 – Collateral
EFAs are secured by a UCC filing specifically on the equipment financed. This means the equipment itself (and just the equipment itself) is the collateral.
Installment Loans are typically secured by a blanket lien on all of the assets of your business. Yuck.
Advantage – EFA
Difference #2 – Covenants
EFAs almost never contain restrictive loan covenants that require your business to maintain certain Balance Sheet ratios. This means less red tape and micromanagement of your loan.
Installment Loans often contain restrictive covenants. Meaning they could cause your business to (1) re-qualify each anniversary period by providing financial disclosure annually, and (2) effectively have to ask the bank for permission to borrow additional funds (blanket lien waiver) or make any major financial decisions that impact your business’ Balance Sheet (financial statement covenants).
It hurt just to type all of that. Imagine doing it.
Advantage – EFA
Difference #3 – Rate Adjustment
EFAs are fixed for the entire term of the loan agreement. Installment Loans are typically indexed to a market rate, and therefore are subject to rate fluctuation (this makes it tougher to budget, and often ends up being more expensive over the loans term, especially given the current economic climate.)
Advantage – EFA (fixed is good!)
So now you might be thinking Ok Fletch, you make sense, but certainly the bank MUST have an advantage somewhere, right???
Well, they do – the bank has lollipops. Equipment finance companies usually don’t. However, your dentist might disagree with that being a bank advantage.
Have a nice week, everyone!