Business owners have to make decisions about the equipment they choose. How your business takes on the financial responsibility for the equipment is a vital consideration.
Nearly 80% of businesses choose equipment financing to purchase machinery. As a result, industry professionals are consistently talking about business equipment loans.
Equipment loans can make your work more manageable. So we’ll discuss how these options can be essential to running your business.
Keep reading to learn about topics that include:
● Understanding the benefits of equipment loans
● Navigating equipment loans for new business
● Evaluating rates and term lengths for equipment financing
● Qualifying for equipment financing
● Comparing equipment leasing to equipment financing
Let’s dive into how this class of loans can be pivotal for business. Additionally, we’ll cover how equipment loans stack up with other options.
Business equipment loans are set up for future repayment of funds you use specifically for equipment purchases. These financial instruments are available from online lenders, your traditional bank, or even equipment financing companies.
The loans themselves involve three relevant parties. These parties include the lender, borrower, and seller.
A lender’s role in the process is to set repayment terms, define loan limits and even evaluate your creditworthiness. The lender may provide business history requirements. Additionally, the lender sets the type of equipment you can purchase with the funds.
A borrower on a business equipment loan is responsible for repayment. This repayment includes interest and finance charges and the principal balance of a loan. In addition, the seller may opt to provide an equipment quote.
This quote from a seller is precious, as it helps dial in the financing you will require. Fortunately, while the annual percentage rate on an equipment loan can vary, a borrower may be able to finance as much as 100% of the equipment’s value.
The obvious question that business owners and potential borrowers have is how equipment loans work for new businesses.
How Equipment Loans for New Business Work
One way that equipment financing for new business works is by allowing the equipment to work as collateral. As a result, approval and funding lead time can be speedy.
Lenders often find the collateral encouraging and can provide the next steps sooner. New business owners often need equipment financing to help drive the essential functions of the business.
While some vendors even offer in-house financing, existing relationships with banks or financial institutions can be favorable. In addition, your business qualifications can work in favor of the equipment loan you want.
There are equipment cases that may need installation, delivery, or warranties. In those conditions, some financing options will include these costs. As you consider whether the available funding is a fit, the term lengths of the loan and the rates are essential to know.
Rates and Term Lengths for Equipment Financing
As the market adjusts, equipment financing interest rates can be anywhere from 4% to 30% APR. Therefore, it is always a suggestion to research the best option to fit your goals and financial circumstances.
The term lengths of loans will also vary. Your business must have the qualifications to improve its standing with financing companies or institutions. The equipment’s ability to retain its value is also a factor in equipment loan term length.
If your equipment is likely to have a long shelf life, that can bode well for your loan. On the other hand, shorter shelf life means the financial institution is expected to look closely at higher rates for a shorter term.
However, there are instruments like term loans. These allow a borrower to receive a lump sum of funding. It can be similar to a mortgage or vehicle loan in payment terms. Borrowers often find it simpler to budget when using a fixed-term loan and an interest rate that does not change.
Getting the right financing for your business means having the right qualifications.
Qualifying for Equipment Financing
Like any lender, business equipment loan financing means you have to qualify. In addition, lenders are looking for people who demonstrate responsible use of funds.
That can include a business history of more than one year. In addition, that time in business should reflect robust income. Typically, this income should be $100,000 or more annually. A credit rating is also a consideration by lenders.
Your credit rating would likely need to be no lower than 600 to secure funding. Business equipment loans are best when your credit is excellent. Providing a business plan and updates to financial statements can help your business qualify for the equipment financing you need.
But how does equipment financing stack up to equipment leasing?
Comparing Equipment Leasing to Equipment Financing
Businesses need more capital to invest in the growth of the company. Having more cash flow is a terrific upside to equipment financing. Operating expenses are not cheap, so this is a valuable perk of the business equipment loan option.
However, there is less of an initial expense with equipment leasing. Still, with a fixed-term loan, business owners can use equipment financing to help hedge against inflation.
The equipment can generate revenue while under a fixed-term loan. However, there is still a path to ownership with a lease. Lease-to-own options are just one of the possibilities.
There is still the potential default risk with equipment financing. Yes, you may write off the purchase price of qualifying equipment, but it is essential to be aware of the possibilities.
If you default while you have equipment secured by a blanket lien or a personal guarantee, you could forfeit your assets to cover costs. Discussing your plans with the right team is invaluable.
Small Business Bank
When you dialogue with a Small Business Bank professional, you can find out if you and your business are ready for financing. Getting an honest look at your financials with professionals brings true peace of mind.
Log on now to learn more about what Small Business Bank offers and if there are options right for your business.