- Quick access to cash
- Limited paperwork
- Equipment serves as collateral
- Equipment could be obsolete by the time the loan is fully repaid
- Might need to depreciate equipment, so you can’t deduct full cost each year
Who Qualifies for Business Lines of Credit?
As it turns out, most businesses can qualify for equipment financing.
How much you qualify for—and the interest rate you’ll pay—depends on the value of that equipment, your business’s financial history, and your credit score.
Equipment financing can be a great option if your credit rating is less than perfect, too, since the equipment acts as collateral:
In fact, equipment lenders are just as concerned with what’s securing their loan as with your borrowing history.
How to Apply?
An equipment loan application can be a simple process, depending on the equipment lender you’re working with. You’ll likely need to provide your credit score and prove the financial health of your business with tax returns and bank statements.
On top of this, equipment lenders will typically ask for information about the equipment you’re purchasing with the financing. That’s why most equipment financing applications will require an equipment quote, or an equivalent documentation of the equipment.
Documents you need:
Driver’s License, Voided Business Check Bank Statements Balance Sheet Profit & Loss Statements Credit Score
Business Tax Returns Personal Tax Returns
Generally speaking, a smaller, shorter-term option will come with an easy and fast application process. Larger and longer-term options might require more paperwork and could take slightly longer to fund.
It takes money to make money—every small business owner knows that.
Sometimes you just need that new piece of equipment or machinery to seal the deal and start bringing in more revenue… But how can you afford it?
Fortunately, this is a problem lots of the business owners we work with at Fundera face. And it’s one we can help you solve, too.
Here’s how equipment financing can get you on track to grow your business.
When your business needs a certain piece of equipment to get started or reach the next level, a small business equipment loan could be the right move—especially when you don’t have cash on hand to purchase the piece of equipment upfront.
You can use equipment financing to purchase almost any kind of business equipment, from computers to cars—and everything in between.
How much you can borrow depends on the type of equipment you’re buying and whether that equipment is new or used, since it actually serves as collateral to secure your loan.
If you’ve ever had a car loan, you’re already pretty familiar with the idea:
The price of that equipment dictates the amount and terms of your equipment financing, and you won’t need to put up any extra collateral.
In fact, an equipment loan is a self-secured loan. This means that the equipment itself acts as collateral for the loan. The self-collateralized aspect of equipment financing can make these loans slightly easier for some business owners to qualify for.
Why? Because the equipment provides security for the lender. If you can’t afford to pay back the loan, the lender can simply seize the piece of equipment and liquidize it for cash to recoup their losses.
And here’s another good thing to know:
Most equipment loans are made at fixed interest rates—usually between 8% and 30%—with set term lengths, so you can expect the same payment each and every month.
How long you can extend the term of your equipment loan depends on the sort of equipment you’re financing, as well as its anticipated lifetime.
Understandably, not too many lenders want to extend their equipment loan terms beyond when that piece of equipment is expected to be useful…
After all, the whole point is that they’re financing a tangible asset that will give your business value.
Some equipment lenders will set terms for the expected lifetime of the equipment. But most lenders will set a maximum of 10 years on the equipment loan.
Of course, there are other options besides equipment financing.
Some business owners choose to lease instead of getting an equipment loan, for example. There are definitely advantages with leasing, but with an equipment loan, you’ll own that equipment after your loan gets paid off.
On the other hand, with a lease, you only get to use that equipment while you’re paying.
So if you know you’ll need that equipment for awhile, equipment financing could be the right move. But if you’re looking for a temporary solution, a lease might make more sense.
What Will Equipment Financing Cost You?
With equipment financing, the thing to keep in mind is that it stops you from needing to pay the entire cost of that equipment upfront.
Instead, you’ll pay it off in regular installments, just like any other term loan.
However, you’ll be paying more to finance that equipment with an equipment loan than you’d pay if you purchased it outright without financing. The tradeoff is for businesses that can’t afford that kind of large expense or don’t want to deplete their cash with such a large purchase.
Let’s say you have a piece of equipment you’d like to purchase that costs $10K.
An equipment financing lender offers to upfront you the cash to purchase that equipment, but they’ll charge you 12% interest over a 3 year (or 36 month) term.
With a 12% APR, that means your $10K piece of equipment will actually cost you $11,957.15, with a monthly payment of $332.14.
At this point, you’d have to take a look at your business’s financials and ask yourself:
Can you save some money by shelling out $10K right this minute and avoiding interest payments, or will that huge expense hurt your cash flow too much?
And if you can’t afford it now, will saving up to buy it later mean lost profits, since you could have used that equipment in the meantime by financing it?
Essentially, you need to figure out whether the opportunity cost of waiting and saving outweighs the interest payments you’d make to have that equipment right now.
There’s no right or wrong answer—but if you plan your financials well, the right equipment should bring in more than those interest payments are costing you.