When you borrow to buy a used machine, the lender is really judging two things: your business and how well the machine will hold its value. That second part is what makes a used equipment loan different from a regular business loan, and it explains most of what you’ll be asked, quoted and offered. This guide walks through how it works in Canada, what it costs, and what to check before you commit.
The value a lender would place on the equipment when in operation.
The value is readily available on an invoice when using a new machine. Having a used one means the lender will have to guess what its worth is now and what it would be worth if the loan failed. The machine serves as collateral, and its resale value is of great significance.
Which is why they don’t overlook certain elements that the seller may have overlooked: the age, hours/kilometres, make & model, and who is selling it. An excavator that is popular and of a well-known brand is easier to finance compared to any other obscure brand that is not known to anyone in the market to buy. Your own side of the story is still relevant, and it doesn’t matter how long you’ve been in business, or your bank statements, or your repayment history.
If you’re shopping, be sure to find out at the beginning what the lender will agree to. If a particular machine isn’t a seller, it’s more advantageous to find out beforehand than pay a deposit.
Where do the savings come from, and where do they NOT come?
The allure is clear. A used heavy equipment machine will have a lower initial cost, and it has already depreciated the most. This enables you to leave more funds in your cash flow for wages, fuel and work you’ve already done.
The catch is repairs. The hydraulic system can leak, and the engine can be old and worn out, both of which can drive up the cost of the machine. Consider all maintenance expenses, not just the price, when comparing a used loader to a new one. A good inspection fee is a dime a dozen in comparison to a shock repair bill.
Rates and terms you can look forward to!
Used equipment financing terms at Service Capital are from 1 to 7 years with interest rates ranging between 7% and 24%. The location you fall depends on the prime rate, your repayment track record, your creditworthiness and the equipment itself.
In order to illustrate the importance of the interest rate, let’s assume you are borrowing $60,000 and the length of the loan is 5 years. The payment would be approximately $1,245 per month for 9% interest, with a total payment of just about $74,700. At 15%, it’s about $1,430 a month and roughly $85,600 in total. It’s about $10,900 on the same machine. (These are examples showing what the maths looks like – not quotes!)
That’s why it is so important to get the term right. Match the loan period with the useful life of the machine. If the equipment has three good working years remaining and a seven-year loan, you are going to be putting a strain on the cash flow for years after the equipment is paid off.
What kind of equipment can be financed?
Mostly, it’s the kind that does heavy work. Clients bring in used loaders, tankers, excavators, semi-trucks and other heavy machinery and use them to get longer terms, better rates and more funding than a plain-term loan might give.
It goes well beyond construction. The same type of financing covers manufacturing equipment, farming and mining machinery, restaurant and food processing equipment, salon equipment, medical equipment and IT or office gear. If it earns money for your business and keeps some resale value, it’s worth asking about.
Service Capital also says that when equipment is part of the deal, the term can stretch out, which allows it to raise more funding for the business. As an example from the company, a business with $2,000,000 in yearly revenue could qualify for around $200,000 in working capital on a 12-month term, and with equipment involved, funding can reach $1,000,000 or more depending on the machine’s value and the health of the business.
Buying from a dealer or a private seller
In Canada, who you buy from changes the paperwork.
A dealer usually gives you a clearer paper trail, and sometimes a warranty. A private seller can offer a better price, but you take on more checking yourself.
Either way, confirm the seller actually owns the equipment free and clear. Search your province’s personal property registry for liens before you pay. A lien left on a machine can follow it to you, and lenders will usually want it discharged before they fund the purchase. Ask also about sales tax. GST, HST or PST may apply, and the rules vary by province and by type of seller, so check how much to budget.
For tax treatment of the equipment itself, including capital cost allowance, talk to your accountant. Interest and fees on equipment financing are generally deductible, but the details depend on your situation.
Loan, lease to own, or sale lease back
A straight loan suits you if you want to own the machine and keep it for years. Lease to own spreads the cost and leads to ownership at the end, which can help with cash flow in the early months.
If you already own equipment that’s paid off, there’s a third route. Service Capital runs sale lease back and buy back programs, where you use unencumbered equipment as collateral to raise cash while you keep working with it.
What you need to apply
The checklist is short. You need a signed credit application, details about the equipment, and a few months of business banking. With those in hand, approval can come in a few hours, and funding can arrive in as little as three days. Quotes stay good for a month, which gives you time to compare offers.
Details about the equipment should include the make, model, year, price, and who’s selling it. Many lenders will also give you a pre-approval, which helps when you’re negotiating with a seller. A seller tends to take a buyer more seriously when the financing is already lined up.
