Equipment Financing: A Quick What, When & How Guide

Equipment financing is a term that refers to a specific type of business loan used to purchase assets needed for your company’s daily operations. Funds from this financial agreement can be used to buy all business equipment, ranging from manufacturing machinery, to computers and phone systems, restaurant ovens, to vehicles. 

In short, any equipment considered essential for the processing or manufacturing of business products is included. There are many incentives for business owners to choose this type of financing, including but not limited to:

• It protects cash flow by avoiding the need to finance equipment out of pocket, which can often cost tens of thousands of dollars. Given that a lack of capital is the main challenge for 33% of business owners, this is hugely important. 
• This financing type can cover the total cost of equipment, meaning you avoid paying interest to the equipment supplier. This loan can be used for new and used machinery.
• The loans are ‘self-secured,’ meaning the equipment itself is used as collateral. You can also gain quick access to funds, with much longer repayment terms than with other funding options - they usually last 10 years, or the lifespan of the equipment.

While there are many types of small-business financing available for different aspects of running a company, a dedicated equipment loan is the most appealing when purchasing assets required by your workforce. To be fair, SBS loans, lines of credit, and business credit cards can still play a role in financing equipment purchases.

How Equipment Financing Works

A dedicated equipment loan isn’t overly different from other small-business loans. The main contrast comes from the structure. While other loans can be used in many ways, equipment financing’s only purpose is to pay for tools and assets needed for the business to perform and produce goods.

This type of financing is primarily used on assets whose value resists quick depreciation. Because the loans are often ‘self-secured’ with the assets serving as collateral, the process is often relatively simple:

• Submit a quote to show how much the proposed equipment purchase will cost.
• Show you can contribute a down payment - in many cases, this is 20% of the purchase cost.
• Pass the financial checks to confirm your bank would lend this figure and provide your loan details.
• Access the funding within two business days before completing the intended purchase.

Equipment loans usually offer fixed rate repayment plans that commonly last three to 10 years, but can vary anywhere from two to 25 years. The equipment financing rates range from 2% to 25%. The figures will depend on a range of factors, including your credit score, business track record, borrowing amount, term duration, and choice of lender.

Once your funds have been released and the equipment has been purchased, those assets will belong to the company. This also means you will be free to sell the assets if ever deemed necessary - to upgrade your tech in a few years, for example - without the bank’s permission.

Other Things You Need to Know About Equipment Loans

The way equipment financing works makes it one of the quickest routes to purchasing what you need. Moreover, this type of loan is often a good option for cash flow maintenance, and allows you to keep items like working capital loans separate.

However, in most cases, you’ll notice that a lien will be placed on the equipment. If you fall behind on your payments, the lender may repossess the assets to cover the costs. When you have personally guaranteed the loan, your personal assets could be at risk, too, so you must use this financial product responsibly.

There are several circumstances where you may need an equipment loan:

• You need equipment for a new business.
• Your current equipment needs upgrading to stay competitive.
• Repairs are costing you a fortune.
• You want to preserve your working capital.
• Your business could benefit from offsetting a tax burden.

Many factors influence a company’s borrowing power, but most startups and small businesses will borrow between $10,000 and $125,000 for equipment.

Qualifying for a Loan

Traditional bank lenders often offer this type of financial product, and you can probably get it elsewhere as well. 

Lenders will have varying requirements. As a general rule of thumb, you will be:

• Looking to borrow between $10,000 and $500,000.
• Have a personal or business credit score of at least 600.
• Be willing to use the equipment as collateral for the secured loan.
• Be able to provide a business plan for future growth.
• Show profit and loss accounts to support your claims.

In most cases, you’ll need to have been operating for at least 12 months, with annual revenue of at least $100,000. If you do not meet strict bank lending rules, you can look to online lenders. If you find one you haven’t heard of, though, you must do your due diligence to confirm its legitimacy.

Whichever lender you turn to, it’s essential to understand the pros and cons before submitting an application.

The positives are affordable funding solutions, quick payouts, and a credit history boost. It’s also possible to make the monthly repayment a tax-deductible operational expense.

The main drawback is that it’s still more expensive, long-term, than buying the equipment outright, and failure to meet repayment plans also leads to problems.

Equipment Leasing as an Alternative

Leasing is another alternative that may appeal to startups or companies planning to use the equipment for a few years only.

In this case, however, you pay an agreed rental fee to lease the equipment from an owner before returning it upon the end of that term. The eligibility requirements are less strict, but it does mean you forego the benefits of ownership, including the resale value.

In Conclusion

If your business is ever going to succeed, getting the necessary equipment will be vital. As this is one of the largest overheads you can face, you can use equipment financing loans to maintain cash flow while ensuring your workers are supported with the tools needed to thrive. 

With the right equipment and machinery in place, you can focus fully on achieving your goals.