Equipment financing for climate startups

If your climate startup needs equipment or hardware, equipment financing provides a cost-effective and flexible alternative to paying for it upfront with your hard-earned cash. You can rent or lease almost anything, from off-the-shelf equipment like office chairs and iPads, to bespoke manufacturing equipment. So how does this type of financing work? And what are your options once the rental/lease period ends? 

Sam Posl manages the Pacific Northwest for Camber Road, an equipment leasing company for VC-backed businesses. We sat down with him to discuss the difference between equipment leases and loans, the nuts and bolts of this type of financing, and tips for navigating the process.

Equipment financing structures

1. The lease
With many providers of equipment financing, you can rent equipment in much the same way as you rent office space. You’ll choose your equipment and negotiate payment terms and price with the vendor, then the leasing company will pay for it on your behalf and rent it to you while they retain ownership. With this model, you’re committing to renting the equipment for the term of the lease, so if you want to end the lease early, you’ll still be on the hook for the rest of the payments.

This structure works well for founders because there’s no additional collateral needed, no equity or warrants, no liens on the business or IP, no restrictive or negative covenants, and no personal guarantees from founders.

2. Equipment-backed loans
In other cases, equipment financiers prefer a structure that’s more similar to a term loan, secured against the value of the equipment (i.e. an asset-backed loan). Such financing will typically involve some equity, warrants, or a success fee, as well as operational and financial covenants. This type of financing will also come with a defined interest rate, rather than the fixed monthly rent payments that come with a lease. This may be a better fit for some companies or equipment, as costs tend to be lower, but not all companies will qualify for this structure. 

Equipment financing in practice

Runway requirements
As a rule of thumb, if you have less than a year of cash runway, it’ll be tough to secure any kind of financing, including equipment financing (lease or loan). Regardless of the direction you go, you’ll need to get the lender/provider comfortable with your liquidity and/or be able to show the lender where your future cash is coming from, ideally with a signed term sheet or other funding docs.

The financing process
The timeline for equipment financing can vary depending on who you’re talking to. If you’re working with a large debt fund who’s going to do an equipment loan for tens of millions of dollars, or a company that needs to find a source to fund the deal, it could take months. Underwriting processes for venture lending at banks typically take months as well. If you're working with someone who’s lending off their own balance sheet, and uses their own money, things can move much faster.

Lenders will all have similar requirements, but the extent to which they’ll dig in to your business model and undertake diligence (like calling references) will vary. Most will want to see a cap table, bank statements, and historical and projected financials, amongst other diligence items. On the equipment side, they’ll need to know what the equipment is, what it does, and how it affects your business. 

While established companies with strong balance sheets will be offered leases that match the useful life of the equipment - like a lease for laptops that lasts 5 years - this will often be too risky for the lenders when it comes to cash-burning, venture-backed companies. Instead, expect a shorter lease that the equipment will likely outlast. This is still a great option for startups looking to minimize dilution, preserve cash, and extend runway, especially when the alternative is using equity dollars to buy equipment upfront.

Pricing
For both loans and leases, pricing will depend on the term, the structure, the equipment, and your company. Currently, you can expect the interest rate for equipment loans to be in the teens. The implied rate might even be negative - so if the equipment is worth $1m, the lender might recoup $950k over the initial term. Again, this is because the useful life of the equipment is longer than the lease and you’re leasing it with the option to return it or continue using it after the initial term.

In all cases, you should build a financial model that outlines your out of pocket costs to close the deal, your monthly costs during the life of the lease or loan, and any costs associated with the continued use of the equipment at the end of the initial term. This can help you compare options available to you against using equity dollars, or other forms of dilutive capital.

When the term ends
Once the initial term of an equipment lease has ended, you’ll have three options: return the equipment, purchase it, or continue to lease it.

If you decide to purchase it, you’ll need to negotiate a price with the lessor. There are multiple ways to value used equipment. A couple examples are the in-place value, or how much the equipment is worth where it’s sitting, and replacement value - how much could you find the same used equipment on the open market for? Usually, the purchase price will be set somewhere in the middle of these two figures. 

You can also return the equipment to the lessor, or choose to continue renting the equipment, typically at a lower month rent.

Tactics for a smooth equipment financing process

1. Ask whether it’s right for you
Equipment financing can be an incredibly useful tool, and a great part of the capital stack if you use it correctly and at the right time. As your balance sheet improves, you will have access to better terms and more forms of financing - you might be able to secure a term loan with better pricing/structure than equipment financing, for instance. Plus, be aware that there’s such a thing as too much debt compared to the equity you’re raising. Before you start the process, get a second opinion on whether it’s actually the right product for your company right now. 

2. Consider your options if you already have other debt
Having other debt can potentially benefit you if you want an equipment lease - it shows that another entity has done their diligence and found you viable enough to lend money to, which may give the new lender additional conviction. 

On the other hand, you might run into difficulties looking for an equipment loan if you already have other debts on the balance sheet that have an all-assets lien or complex covenants. Depending on the existing loan structure your lender might have the ability to not allow you to take on other debt.

3. Research the provider 
Dig into the equipment financing providers you’re considering to make sure they’re a good fit for you and your goals. You want an all-weather partner, and one that can grow with you as your business expands and capex needs increase. Ask founders and investors in your network if they’ve worked with the financing provider before, rather than asking the provider itself for references.

4. Get your financial house in order
When it comes to the diligence process, give the lender everything they need right from the start and make sure it’s all clear and well-documented. If your projections don’t make sense, you’re missing key information, or the lender has to ask multiple clarifying questions, it will only delay the process. 

5. Always be upfront with your lender 
Ideally, your relationship with your lender is for the long haul, so honesty and communication are key. If you’re not communicative, or lie either directly or through omission, it can make it difficult for your lender to be a good partner. Your lender can only help you if you’re open and upfront when things don’t go according to plan. 

Sam Posl manages the Pacific Northwest and Western Canada for Camber Road, a leading provider of equipment leasing for high-growth and venture-backed companies. Before joining Camber Road, he spent over 10 years in various banking, finance, and equipment leasing roles. He lives in Portland, OR with his partner and their two dogs, Buoy and Tula. In his free time he can be found hiking around the PNW, on the golf course, trying out a new restaurant, and cheering on Minnesota sports.