Equipment financing loans can be an excellent option for businesses. For example, 2020 saw $43.3 billion from equipment finance companies go to small and medium-sized businesses in the United States. These loans allow you to borrow money to buy the needed equipment, then pay it back with interest.
This piece will examine equipment financing loans, including how they work, the best equipment financing companies and lenders, and some frequently asked questions.
This kind of financing can bring numerous benefits, to include:
- Access to better equipment: Equipment financing loans allow businesses to acquire new or used equipment that they may not have been able to afford otherwise. This ability can increase efficiency, productivity, and competitiveness in the marketplace.
- Conserves working capital: Financing equipment can help businesses avoid tying up their cash reserves, which can be better used for other expenses such as payroll, inventory, or marketing.
- Fixed payments: Equipment financing loans often come with fixed payments over a set period, making it easier for businesses to budget and plan their finances.
- Tax benefits: Businesses may take advantage of tax deductions for the interest paid on the loan or depreciation of the equipment. This advantage will depend on the type of loan.
- No collateral required: Some equipment financing loans may not require collateral, which can be helpful for businesses that do not have significant assets to use as collateral.
How Equipment Financing Works
Asset-based financing includes equipment financing, a market valued at $903.1 billion in 2019. This financing process is one where the existing technology is used as security for the loan. As a result, less stress is placed on personal credit or other forms of collateral when businesses apply for financing.
When you take out an equipment loan, you can typically borrow up to 100% of the cost of the tools you want to buy. The amount you can borrow will vary depending on the equipment loan company you work with and your company’s qualifications. Owners repay the debt over time with interest.
In addition to financing the equipment, some lenders may also finance soft costs, such as delivery, installation, warranties, assembly, and other one-time expenses required to get your equipment set up and running. Certain equipment financing companies will finance these costs on top of the total value of your equipment, offering, for example, 125% financing – 100% for the equipment and 25% for soft costs.
It’s important to note that some equipment financing companies may only finance a percentage of the cost of the equipment, say 75%, and allow the remainder of the loan (25%) to your soft costs. If soft costs are a significant portion of the total cost, finding an experienced equipment financing company to finance some of these expenses can be helpful. This way, you’re receiving the same interest rate to finance your soft costs as you are for the rest of your equipment loan, and you don’t have to use the funds you have on hand or take out a separate loan to cover them.
Equipment Financing Rates and Terms
Repayment terms and interest rates on equipment financing can vary depending on the equipment finance company, your business’s qualifications, and how long the equipment you’re purchasing is projected to have value. Generally, terms on equipment loans are based on the anticipated life of the equipment or machinery you’re purchasing.
Anecdotally, equipment financing interest rates range from 4% to 30% APR. Remember that rates will vary depending on your business’s qualifications and lender.
Equipment Financing vs. Equipment Leasing
Lenders may offer equipment leasing as an alternative to equipment loans. With equipment leasing, you rent the equipment from a vendor, lender, or specialized equipment financing company. At the end of the lease, you can choose to return the equipment, renew the lease, or buy the equipment.
Equipment leasing can be a good option if you intend to use the equipment for a limited time. Leasing can reduce costs and maximize an investment, particularly for less valuable and productive equipment as it ages. Some equipment leasing companies also offer the option of buying the equipment at its current market value.
However, leasing can cost more than financing if you plan to use the equipment for a long time. According to the Equipment Leasing and Finance Association, leasing is “likely the preferable option” for equipment you plan to use for 36 months or less. If you’ll use it for longer, it makes more sense to buy it.
Pros and Cons of Equipment Financing
In the United States, 70% of all manufacturing equipment is purchased using financing, but as with any funding, equipment financing loans have pros and cons.
Affordable: Equipment loans can provide competitive interest rates and long terms. SBA 7(a) loans, for example, typically offer terms of up to 10 years for equipment purchases.
Equipment ownership: You’ll own the equipment outright once the loan is fully repaid. This arrangement gives you more control over the equipment and allows you to use it as collateral for future loans if needed.
Self-collateralizing: Since the equipment serves as collateral, you may not need to rely as heavily on personal credit, time in business, or other collateral to qualify. Startups and businesses with bad credit may still be eligible for equipment financing.
Tax savings: At tax time, the interest you’ve paid is deductible, and you may also qualify for a depreciation tax benefit.
Outdated equipment: If the financed equipment becomes obsolete, you’ll need to sell or dispose of it. This disposal means you may need to purchase new equipment before fully paying off your loan.
Down payment: An equipment loan may require a high initial down payment, which can be difficult for some businesses to come up with.
Where to Get Equipment Financing
There are several options for obtaining equipment financing, including online lenders, banks and credit unions, and SBA lenders.
Online Lenders: Online equipment finance companies can offer access to equipment financing with more flexible qualifications than a traditional bank or SBA loans. Some online lenders work with startups or businesses with bad credit. Many online business lenders also offer streamlined application processes and fast financing – sometimes funding loans within 24 hours. However, equipment loans from online equipment financing companies are typically more expensive than bank or SBA loans, with shorter terms and higher interest rates.
Banks and Credit Unions: Banks and credit unions generally offer equipment loans with the most favorable interest rates and terms, but they also have strict eligibility requirements. To qualify for equipment financing from a bank, you’ll typically need strong personal credit (a FICO score of 700 or higher), several years in business, and excellent financials.
However, getting an equipment loan from a bank or credit union is likely your most affordable option if you can meet these requirements. In addition, some institutions have business divisions devoted to equipment financing across different industries.
SBA Lenders: As an alternative to traditional bank financing, you might work with an SBA lender (typically a bank or credit union) to get an SBA loan. SBA loans have long terms – generally up to 10 years for equipment loans – and low-interest rates. They also allow you to use the equipment you’re purchasing and the equipment you already own as collateral.
To qualify for an SBA loan, you’ll generally need a good personal credit score (690 or higher, although some SBA lenders may have lower score requirements) and strong business finances.
Common Questions about Equipment Financing Loans
What is equipment financing?
Equipment financing is a loan used for purchasing business machinery and equipment. Equipment loans are typically structured as term loans that you repay, with interest, over a specific period.
What are typical terms for equipment financing?
Repayment terms on equipment financing can range from several months to 10 years. Generally, times are based on the anticipated life of the equipment or machinery you purchase.
What is a reasonable interest rate for equipment financing?
Interest rates on equipment financing can fall as low as 4% but as high as 30%. Generally, banks offer equipment loans with the most competitive rates and terms.
Can a startup get equipment financing?
Startups may be able to get equipment financing. In addition, because the equipment you purchase serves as collateral on your loan, lenders can be more flexible with their qualification requirements.
Equipment financing loans can be an excellent option for businesses looking to purchase essential machinery and equipment. However, with so many equipment financing companies and lenders, it’s critical to carefully research and compare your options.
Talk with the professionals at Small Business Bank to better understand your options today.
By understanding the pros and cons of equipment financing and the different types of lenders available, you can make an informed decision and find the right financing solution for your business.