Equipment Financing: A Quick What, When & How Guide
Whatever your line of business, ensuring your employees are equipped with the necessary machinery, tools, and products is vital. However, the outlay needed to cover those expenses isn’t easy to find for an SME. That’s why equipment financing was created as a potential solution.
This quick guide will teach you how to purchase your business equipment most effectively. Whether you’re launching a startup or completing an upgrade to keep up with the competition, the right type of financing will power your workforce in style.
What Is an Equipment Loan?
Equipment finance 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 Does Equipment Financing Work?
A dedicated equipment loan isn’t overly different from other small-business loans. The main contrast comes from the structure. While other SMB 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 finance 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, when looking at how to get equipment financing, 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 an Equipment Loan
If you think this type of borrowing is right for you, the next issue to consider is where to get equipment financing. 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 equipment loan specialists. 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 equipment financing 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.
Is Equipment Financing the Same as Equipment Leasing?
Purchasing equipment via equipment loans or standard business loans isn’t the only option at a business owner’s disposal. Leasing is another alternative that may appeal to startups or companies planning to use the equipment for a few years only.
If you’re wondering what an equipment lease is in financing, car leasing is a good example, only in this case, 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.
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.
How do you finance new equipment?
Financing costly new equipment through a dedicated loan means you purchase the equipment and repay the lender. The term is usually longer than for other business loans. Leasing is an alternative option.
What equipment can be financed?
Any equipment your business needs to manufacture products or complete its daily operations can be financed through this type of loan. Popular items include furniture, factory machines, computers, tools, vehicles, and phone systems.
What credit score is needed for equipment?
When financing equipment for your business with this method, there are two main requirements to meet. The first expectation is that you will use the items as collateral. The second is that your credit score is at least 600.
What are the benefits of equipment financing?
Funding equipment purchases this way allows you to use the equipment as collateral. Moreover, you can fund 100% of your assets and gain access to funding quickly. The term of the agreement is often longer than other funding choices too.
I have always thought of myself as a writer, but I began my career as a data operator with a large fintech firm. This position proved invaluable for learning how banks and other financial institutions operate. Daily correspondence with banking experts gave me insight into the systems and policies that power the economy. When I got the chance to translate my experience into words, I gladly joined the smart, enthusiastic Fortunly team.
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