Equipment financing is small business funding designed to supply you with money for new commercial equipment, such as electronics, vehicles, or heavy machinery. This type of funding can only be used for fixed asset purchases. Often, the new asset or an existing one is used as collateral to secure the loan. If the borrower defaults on the loan, the collateral may be repossessed by the lender.
Up to $5 million
Up to 6 years
7.5% to 45%
In as little as two business days
Equipment Financing at a Glance
Compared to many other types of business funding options, commercial equipment financing can be a little more straightforward. This is because of the automatic collateral associated with this type of financing. This collateral can come in the form of a blanket lien on the equipment you are funding or a personal guarantee. What you are liable to lose will depend on which type of collateral is used to guarantee the loan. Here are the main points in regards to it.
- Funding for equipment can be up to $5 million or 100% of the total equipment value. Since the equipment will be used as collateral, the lender may not want to fund more than the value.
- Equipment financing interest rates vary between 7.5% and 45%. Loan providers typically base interest rates on the perceived risk of the borrower.
- Your funding term could be anywhere from 12 months to 72 months.
If your provider quotes you a high-interest rate, you might want to consider what that means. It could be that the lender thinks you are a risky investment. That’s a warning flag. Before taking out the loan, you should be confident that you’ll be able to pay back the funding. Remember, you do not want to end up losing your equipment because you cannot pay back the funding.
Types of Equipment Funding
- Equipment Loans: Equipment loans are what come to mind most often when we talk about equipment funding. Either old equipment, the new equipment you purchase, or even real estate acts as collateral for the loan. Through equipment loans, it’s possible to get all the money you need to purchase the equipment. However, be warned that some lenders may charge you a 20% down payment. You can pay back the loan in as little as 36 months or as long as 10 years, possibly longer, depending on the lender and the loan amount. The typical term for an equipment loan is five to seven years. The average annual percentage rate is between 8% and 30%. These loans are relatively quick; it can take anywhere from a few days to two weeks before you see your funds. While always preferred by lenders, a perfect credit history is not required. The main factor that detracts from a business’s eligibility is how long it has been in operation. Generally, a company should be in operation for at least a year, making this an unlikely option for startups. Rather, equipment loans are best for established businesses that need funding to expand operations.
- Term loans: Term loans are best for older, more established businesses looking to borrow up to $1 million. These loans are repaid in fixed installments over an agreed-upon period. Placing equipment up as collateral is unnecessary for a term loan; however, you may need to offer a different business asset if you want to borrow a considerable amount of money. Term loans have stricter criteria for approval, but, in exchange, have the added advantage of a lower annual percentage rate. Lenders are generally more willing to slash APR for borrowers with exceptional credit.
- SBA CDC/504 Loans: The Small Business Administration (SBA) is a government agency that provides loans to qualifying for-profit businesses. SBA loans typically have highly favorable terms for borrowers, and the 504 Loan Program is no exception. 504 Loans are granted through Certified Development Companies (CDCs), which are non-profit organizations promoting economic growth and job creation within their communities. CDC Loans are best for businesses looking to expand and can be applied to the acquisition of fixed assets. These include real estate, building purchase or renovation, equipment and furnishing, and more. The SBA will typically provide 40% of the project cost, with the lender providing 50%, and the borrower covering the remaining 10%. In some cases, borrowers may be asked to cover up to 20%. Because CDC 504 loans allow businesses to borrow up to $5.5 million, this is an excellent option for large-scale projects. 504 loans have some of the best benefits of any business loans available, including up to 90% financing and fixed interest rates, the result of which equals savings and improved cash flow for you. However, it can take up to eight weeks to complete the approval process and receive funds, making this a poor option for businesses in need of quick cash.
- Small business credit card: Businesses can apply for a credit card. Small business credit cards have the distinct advantage of racking up points and rewards with each use and are therefore useful to businesses that regularly make small purchases. The ceiling for most small business credit cards is $100,000, which means this most likely will not be a viable option for large equipment, building, or land purchases. Interest rates and annual fees may cancel out any potential cashback rewards, so proprietors should think carefully about whether they can regularly pay back money borrowed in a timely fashion to avoid these steep fees. Some vendors do not even accept credit, so it is wise to check whether a vendor you regularly trade with will accommodate credit before applying for a card you may not be able to use.
- Small business line of credit: As with a small business credit card, you may not see the benefits of opening a line of credit for a long while. Unlike small business credit cards, however, businesses with exceptional credit scores may be able to open a line of renewable credit of up to $1 million. Keep in mind that interest rates can easily reach up to 36%, making this an unsustainable cash source and not necessarily a go-to for financing business equipment.
The advantages of equipment financing vary depending on the type of financing you choose, but each avenue can allow you a leg up in growing your business by expanding operations. Qualification for these type of loans depends on several factors, including:
- Personal and business credit scores
- How long the business has operated
- Loan amount
- Method of repayment
- Business’s annual income
If these five factors are in proper order, you might be able to secure funding. Equipment loans are a great alternative to traditional funding, which may take weeks to process and accept your application.
A disadvantage of equipment financing can include potential default. If you happen to default on the loan, you risk losing your equipment or collateral.
Depending on your term and the size of your funding, you might not be able to secure another source of funding while you are paying back your equipment financing.
Your new equipment will likely come with its own expenses, in the form of maintenance and insurance payments. Be sure to factor in these costs when creating your budget plan.
Alternative Equipment Financing Options
If heavy equipment financing isn’t an option, you might consider leasing instead. Equipment leases work the same as most other leases, in that you are renting from an owner. Leasing does not require a down payment and allows you to slowly pay back your debt in fixed monthly installments. Unlike financing, there is no need to put down collateral. The advantage of this is the lower risk to the borrower. However, leasing can result in paying more for the equipment than it’s worth. Despite this drawback, leasing is a decent option for businesses with bad credit. If your credit score leaves much to be desired, you may have a better chance of getting approved for leasing than for financing.
Equipment Financing Wrap-Up
There are many types of providers that offer equipment financing. Most industries are represented. That means that if you need new heavy or commercial equipment, there is likely an equipment financing company ready to work with you. Before looking into any financing option, ask yourself three questions:
- Can I afford a 10% to 20% down payment?
- How long will this asset be useful before becoming obsolete or wearing down?
- How much can I afford to pay each month?
Consider the down payment, monthly payments, potential maintenance costs, and equipment cost before choosing equipment financing. If these factors are within your budget, equipment financing may be a good move for business growth.
Frequently Asked Questions
Most lenders will determine your eligibility for equipment financing based on your business and personal credit scores, the length of time in business, and financial reports. Some lenders may have stricter or additional requirements.
Aside from personal and financial information, you will need to include information about the equipment you are looking to finance. This may include information about the vendor or supplier, equipment cost, and equipment location.
You can use equipment financing to purchase items like hardware, software, large machinery, vehicles, medical equipment, and office furniture.
Some lenders may allow you to purchase used equipment that is in good condition. It is best to check with the lender if they allow used equipment financing before applying for a loan.
In most cases, you will need to insure the equipment you purchase using a loan. This is especially true of used equipment. Insurance coverage may need to include protection against fire, theft, and general liability.