What is an equipment finance agreement (EFA)?

An equipment finance agreement (EFA) is a contract in which a lender pays for equipment and you repay the lender in fixed payments over a set term. You own the equipment from the start, and the lender holds a security interest in it until you have paid in full.

It is the default structure for most construction, agricultural, manufacturing and transportation equipment, and for good reason: it is simple, it keeps ownership with the business, and it usually preserves the tax benefits of buying.

How an EFA works, step by step

• You choose the equipment and get a quote or invoice from the seller.
• The lender reviews your application and the equipment, then issues terms: amount, term, payment, APR and any fees.
• You sign the EFA and provide insurance naming the lender as loss payee.
• The lender pays the seller directly. You take delivery and sign a delivery and acceptance certificate.
• You make fixed payments for the term. When the last one is made, the lender releases its lien.

EFA vs. loan

Economically, an EFA works much like a secured equipment loan. The differences are mostly legal and practical: EFAs are written specifically for equipment, are usually documented in a few pages, and are secured by the equipment itself rather than by a broad lien on the business. Some states also treat them differently from loans for licensing and disclosure purposes.

EFA vs. lease

• EFA: you own the equipment, can usually take Section 179 or bonus depreciation, and there is no residual or buyout at the end.
• $1-buyout lease: similar to an EFA for tax purposes; you buy the equipment for $1 at the end.
• Fair-market-value (FMV) lease: the lessor owns the equipment; payments are lower, and at the end you return it, renew, or buy it at market value.
• TRAC lease: for trucks and trailers; a lease with an agreed residual and end-of-term adjustment.

Who an EFA suits

Businesses that plan to keep the equipment for most of its useful life, want the depreciation deductions, and prefer a simple fixed payment. If you expect to replace the equipment in 2 or 3 years because the technology changes quickly, an FMV lease may cost less.

What to check before you sign

• APR and total of payments
• Term, in months, and whether it matches the equipment’s life
• Fees, and whether they are paid up front or deducted from funding
• Prepayment terms: is there a discount, a penalty, or neither?
• Insurance and maintenance requirements
• Whether a personal guarantee is required
• What happens if the equipment is damaged or destroyed

LenderCloud offers EFAs, $1-buyout leases and FMV leases on equipment from $10K to $10M. All financing is subject to credit approval.