Equipment Financing and Loans for Small Business

If you need new machines to expand your company or simply need to upgrade your existing business equipment, then commercial equipment financing could be a solution for you.

Many businesses can’t afford a major purchase all at once, especially when it costs thousands of dollars.

Even if they can, it doesn’t always make financial sense.

A limited cash flow doesn’t have to limit your ability to get the equipment you need.

Construction Equipment & Commercial Trucks

Heavy equipment financing is extremely common, including construction business loans, commercial truck financing, and semi-truck financing…

But you don’t have to be in construction or trucking to qualify.

Medical Equipment

Hospitals, doctor’s offices, and dentists frequently use medical equipment financing options to outfit and upgrade their practices.

Computers & Office

IT equipment financing is common for any small business with an office, because you could use the loan to purchase computers, printers, fax machines, and other daily necessities.

Gym

Fitness centers can go this route to purchase new gym equipment and machines.

Kitchen & Dining Room Fixtures for Restaurants

Restaurant owners can furnish an entire dining room and equip their kitchen with updated appliances.

If your company has the potential to benefit from working capital to either get started or grow an existing line, then this option could be for you.

How Do You Determine the Lender?

First of all, make sure you understand all of the loan terms being offered:

• What are the rates and are they fixed or adjustable?
• How much of an origination fee does the lender charge?
• How long is the loan repayment term?
• Do they cover any soft costs associated with your purchase?

Another important question to ask is what kind of collateral they require.

Some lenders are happy to use the equipment alone as collateral, but some may require more, such as your home or savings accounts.

That can add a lot of risk to any loan, and it may be one you want to avoid.

If you need the cash quickly, look for an equipment leasing company with a quick application approval time.

Keep in mind that traditional financial institutions may take longer to review applicants, while online lenders could turn things around more quickly.

You’ll still need a bit of cash on hand to use when financing equipment for your business.

Let’s explore some of the associated costs

Down Payment

Just like when you buy a house or a car, equipment financing companies require a down payment on the purchase, sometimes ranging between 10% and 20% of the total price.

Some lenders may only finance the item itself without covering any soft costs like taxes or delivery fees.

Others, however, will allow a portion of soft costs to be rolled into the loan amount.

Interest Rate

Perhaps the most important cost to consider is your interest rate.

That’s the amount of interest you’re charged on your principal balance, which is included as part of your monthly payment.

Obviously, the lower your loan rate is, the more money you’ll save over time.

Fixed interest rates could range between 8% and 30%.

Loan Terms

That leads to another important factor in the determining your total costs: the loan term.

The average heavy equipment loan term is seven years.

If you have to decide between a lower interest rate over a longer repayment period versus a higher rate over a shorter period, do the math to determine which offer saves you more money over time.

You’ll also need to make sure you can afford the monthly payments.

A longer repayment term does spread out your monthly balance, but you’ll end up paying more interest over time.

It’s also a good idea to consult with your accountant on what works best for your specific company.

Origination Fees

Another standard cost when borrowing from lenders is an origination fee.

You’d encounter this fee with just about any type of loan you can take out, so it’s not an uncommon practice.

Origination fees are typically calculated as a small percentage of the loan amount.

Depending on your lender, you might be able to roll the origination fee directly into your loan and pay it off as part of your monthly payments.

How Much Can You Borrow?

The size of your loan depends on the specifics of your intended purchase.

Some lenders only finance 80% – 90% of any type of business equipment loan.

That means if you want to get new heavy equipment and plan on purchasing $250,000 worth of construction machinery, you would only be able to borrow between $200,000 and $225,000.

You’d be responsible for paying the rest of equipment cost as a down payment.

Depending on the company you choose, there might also be a minimum amount you’re required to borrow.

Minimums sometimes range anywhere between $5,000 and $25,000 so this might not be a viable option for small purchases.

In a situation like this, you could either wait to buy more items in bulk or explore other small business loans or lines of credit.

Every lender offers different terms depending on a wide array of factors that can include information like your credit score and business finances. However, some of these factors are pretty general. For example, a standard repayment term for a non-SBA (Small Business Administration) equipment loan can vary from one to five years. In some cases, lenders will provide up to a ten-year repayment term when necessary.

It’s common for small business owners to see the best rates and most extended terms through a traditional bank or with an SBA loan if they meet all the requirements and have good credit.

Much like anything in life, there are pros and cons. Some of the advantages of equipment financing are the following:

It offers capital you can use to buy, repair, or lease equipment.

It might seem redundant to include this bullet, but this should be one of the decisive factors regarding this topic. While some types of businesses don’t rely as heavily on specialized equipment, many need them for their day to day operations. Even if all you need are computers for all your employees, that can come at a high cost. A loan can help lessen the load and allow you to expand your company.

You can disperse your funds better.

According to a U.S. Bank study, about 82% of small businesses fail because of issues with cash flow. Starting with a massive chunk of your money missing from that budget isn’t any help. The ability to create a structured payment plan for some of those costs can help, especially since the only collateral is the equipment themselves. While it wouldn’t be pleasant to default on that loan, it doesn’t compromise all of your business operations.

As good as it may seem, here are some of the cons of equipment financing loans that you should know upfront. This way, you are better informed and can make a better decision for your business. Some of these are:

The rates for these loans are higher than for traditional loans.

An Equipment loan can offer beneficial interest rates, as low as five percent in some cases. If you have an excellent credit score, a traditional loan could provide even better rates.

The issue with some traditional lenders is the time that it takes for them to provide a loan. Some can take up to 30 to 90 days and could ask for more documentation. If time is of the essence, a traditional loan could be out of the picture, despite being more cost-effective.

You own the equipment.

For better or worse, the equipment is yours. While this could be desirable to some, if these items become obsolete quickly and require constant change, this could become a liability.

If you only need to buy this machinery once and maintain it, it’s a no-brainer. However, if your equipment needs to change regularly, equipment leasing might be a better fit for your circumstances.