Equipment financing is a small business loan structured so that you can buy business equipment by pledging the machine as collateral.
Equipment financing and equipment leasing can allow you to start using the equipment your business needs to generate revenue and pay it off over time. There can be options for all industries, from heavy construction machinery to medical equipment and everything in between. With the equipment itself serving as collateral, you might be able to get lower interest rates than you may see with unsecured business loans.
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Many small businesses don't have the working capital to afford new equipment outright. If you're in that same boat, equipment financing can allow you to borrow money solely to obtain commercial equipment. In a nutshell, equipment financing refers to utilizing a loan or a lease to borrow or purchase hard assets. Hard assets are those considered to be tangible resources or assets with significant value. By this definition, many things can fall under this umbrella. These can range from:
and many more!
Anything used to improve your overall business operations is a hard asset and is in service to your company's soft assets. As such, there are a plethora of loans that cater to different business and types of equipment. Something important to note is that since you're using this loan to purchase a physical asset, it also serves as collateral. If you default on that loan, the lender can and will repossess those items, so you have to be diligent with those payments!
Loans for equipment use the equipment itself as collateral, meaning they're secured loans that don't put the rest of your business at risk. That said, defaulting on these loans isn't ideal, since you stand to lose those essential items for your day to day operations.
You don't have to use the loan doesn't to purchase new equipment in some cases. Used equipment financing may be an option if you want to stick to a budget or are buying items with a long lifespan.
Since you're using these items as collateral, you shouldn't use the funds to make up for issues with cash flow and other soft assets. If you're timely with your payments, these types of products can be incredibly helpful to pay for equipment that would otherwise be too costly to finance. These costs can be especially challenging to finance if you're starting your 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.
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.
Hospitals, doctor’s offices, and dentists frequently use medical equipment financing options to outfit and upgrade their practices.
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.
Fitness centers can go this route to purchase new gym equipment and machines.
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.
First of all, make sure you understand all of the loan terms being offered:
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
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.
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%.
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.
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.
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 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.
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:
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.
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.
| Funding Options | APR | Do you qualify? | Time in Business | Annual Revenue | |
|---|---|---|---|---|---|
Funding Option | APR
| Do you qualify?
| Time in Business
| Annual Revenue
| Get Started |
Funding Option | APR
| Do you qualify?
| Time in Business
| Annual Revenue
| Get Started |
Funding Option | APR
| Do you qualify?
| Time in Business
| Annual Revenue
| Free Quote |
Credit approval is extremely important, and lenders are going to look at your personal finances as well as those of your business.
To improve your chances, get the following details of your business in order:
Start off by requesting a free copy of your credit report.
Make sure everything is accurate and try to address any negative items that might impact your ability to borrow.
Your credit report doesn’t show your actual credit score, so be prepared to pay a small fee if you want to know what it is before you get started.
Your business financials are also scrutinized as part of the loan application process.
Prepare your cash flow statements and also pull together a narrative business plan.
This can help explain your current business line and address any notable items in your cash flow statement.
Then talk about your future growth opportunities and how getting a loan from a capital finance company will help you take advantage of those opportunities.
Put a lot of thought and care into your business plan; after all, not only do you want to qualify for the loan, you also want to do your own due diligence to make sure taking out the loan is a good idea in the first place.
If you need help getting started, do a quick online search of business plan templates for ideas.
Any financial decision for your company should be weighed heavily before making the final call.
The same holds true when determining whether or not this option is right for you. Here are a few things to consider.
First, remember that when you buy your commercial equipment outright, you gain equity in your equipment.
As you pay down your loan over time, this purchase transitions from a debt to an asset.
By leasing, you never build any equity — you’re paying money each month to use it, but you eventually have to give it back with nothing gained on your balance sheet.
You might also be able to take advantage of a few different tax benefits when you use a commercial equipment loan.
IRS Section 179 allows you to deduct up to $500,000 of equipment purchases, even if it’s financed.
Just be sure to consult with your accountant or financial advisor before making any tax-related decisions.
Equipment leasing is another option if you’re hesitant to take out a loan to fulfill your commercial equipment needs.
In some cases, you could even use the lease payment as an expense deduction on your taxes.
Rather than taking out a loan to make a purchase outright, you could instead make monthly payments while leasing equipment, then return everything when the lease term is over.
You can look for an an industry-specific company like heavy equipment leasing companies, or select broader capital equipment leasing companies.
Some scenarios in which you’d benefit from leasing are as follows:
One of the biggest benefits of leasing equipment rather than buying it is that it requires little to no down payment.
So it’s a great option if your company doesn’t have a ton of working capital available for large purchases.
Some companies also allow you to finance at least part of the soft costs, often up to 25%.
Again, that can be a huge help to a company struggling to find the cash to get financing for equipment.
But equipment leasing isn’t just for cash-strapped small businesses.
If you don’t plan on using the equipment you need for more than a few years, you might not want the hassle of having to sell it once you’re done with it.
Or maybe the specific type of commercial equipment you need doesn’t hold its value over time.
In that situation, you could have little to no equity in the equipment by the time you pay your loan off.
Another instance when leasing could be better than buying is if you expect the technology of your particular item to depreciate or change considereably over the next few years.
So if you’re in the medical industry or IT field, or any other area where technology plays an integral role, think about what equipment you’ll need in a few years and how quickly your purchases today will need to be upgraded.
If you do end up leasing, keep in mind that you’ll have to pay a residual at the end of the term if you decide you want to keep it.
Also compare equipment lease rates before making a decision to make sure you’re working with the best company available.
GENIUS TIP: Lease rates often vary depending on whether or not you want to include a buyout option at the end.
In order to expedite the process, you should have certain documents ready.
Here’s what you’ll need to get started:
| Funding Options | APR | Do you qualify? | Time in Business | Annual Revenue | |
|---|---|---|---|---|---|
Funding Option | APR
| Do you qualify?
| Time in Business
| Annual Revenue
| Get Started |
Funding Option | APR
| Do you qualify?
| Time in Business
| Annual Revenue
| Get Started |
Funding Option | APR
| Do you qualify?
| Time in Business
| Annual Revenue
| Free Quote |