What Is Equipment Financing?
Equipment financing is a type of small-business loan designed specifically for the purchase of machinery and equipment essential to running your business. You can use an equipment loan to purchase anything from office furniture and medical equipment to farm machinery or commercial ovens.
Keep reading to learn more about equipment financing and compare your business equipment loan options.
How does Equipment Financing work?
The loan amount you qualify for with equipment financing is determined by the value of the equipment you’re buying. The equipment also serves as loan collateral, which means that if you don’t pay back the loan, the lender can seize it.
Traditional banks usually have the best interest rates and terms, but also have stringent credit requirements. Another alternative for equipment financing is to use an online small-business lender, especially if you need to buy equipment quickly or if your personal and business finances aren’t in great shape.
The loan amount should correspond to the cost of the equipment you’re buying, and the loan duration should correspond to how long you plan to utilize the new equipment. Get a 10-year loan if you’re buying commercial ovens that you plan to use for ten years. A shorter period may put you in a financial bind, while a longer term means you’ll be paying for the equipment long after you’ve stopped using it.
To finance heavy-duty vehicles, some lenders may require an equipment loan, but others may offer business auto loans or semi truck financing. Compare options to determine which is the greatest fit for your company.
Qualifying for Equipment Financing Loan
Lenders’ conditions for obtaining an equipment loan will differ. When making a lending decision, lenders will consider the following general characteristics. However, underwriting standards differ per lender, so be sure you fulfill their minimum needs before choosing one.
When it comes to acquiring equipment loans, both personal and business credit scores will be crucial. You can check your personal and business credit scores online if you’re unclear of your current credit score. The better your credit score, the more likely you are to get approved for a loan with favorable terms.
Lenders may want a business plan that details your company and a thorough proposal for future growth in addition to your credit score. The main purpose is to provide a detailed overview of your company to potential lenders. The number of years you’ve been in business and your annual revenue are crucial aspects to consider while writing your business plan. Some lenders may have minimum requirements in this area, such as two years in business with yearly revenues of more than $250,000.
Lenders may also require a balance sheet or cash flow statement in addition to a profit and loss statement. These should show how much money is coming in and how much money is leaving. These documents aid lenders in determining your company’s financial strength.
You may need to submit certain personal documents as well, because lenders are interested in your personal finances. Past tax returns, bank records, or a summary of all your personal debts could be included.
Choosing an Equipment Financing Lender
Identifying the type of lender that is perfect for your qualifications and needs is a key step in learning how to apply for a business loan. Lenders who provide equipment finance typically fall into one of the following categories:
- Banks: Although they prefer consumers with good credit and a track record, they can offer attractive interest rates, loan amounts, and terms.
- Credit unions: Even when compared to typical banks, member-funded and community-based organizations may provide cheaper interest rates. Eligibility requirements are usually identical to those of banks.
- Online lenders: Online lenders can give faster application and funding turnaround times than traditional loans. Although the eligibility standards may be less stringent than those of other lenders, interest rates may be higher.
Keep in mind that when you apply for a loan, lenders will typically perform a hard credit pull (or enquiry) to determine your creditworthiness. Your credit score may be affected as a result of this. However, many lenders allow customers to see if they are pre-qualified for a loan. This usually entails the lender performing a light credit pull (as opposed to a hard credit pull). The credit score of a potential borrower will not be affected.
How to apply for a Equipment Financing Loans
Equipment finance can be obtained through a variety of sources, including standard nationwide bank lenders and smaller, specialized online lenders.
Traditional bank lenders may have more stringent underwriting standards, but they also offer better rates and terms. They may be better suited to well-established enterprises with plenty of cash and assets.
On the other hand, specialized internet lenders are more lenient with their underwriting standards. The rates and terms, however, may not be as favorable as those offered by a regular bank lender.
This form of lender is better for startups or firms that don’t meet bank lending’s minimal credit and asset standards. The ideal option for you, however, is determined by where you are in your business’s path and whether you value better rates above speedier and more flexible service.
When it comes to obtaining finances for your business, it’s crucial to understand that an equipment loan isn’t your only choice. Consider a business credit card, invoice factoring, merchant cash advance, or angel investing if you’re buying very inexpensive equipment. Each has advantages and disadvantages in terms of terms, turnaround time, and qualification criteria.
Documents needed for Equipment Financing Loan
After you’ve decided on a lender and are ready to apply for a business equipment loan, the following step is to gather evidence to demonstrate that your company is capable of making the loan installments. Here are a few of the documents that are usually necessary when applying for a loan:
- Bank statements for both your business and personal accounts
- Personal and Business tax returns
- Business legal documents
- Personal identification
- Personal Resumé
- Business strategy
- Statements of Income
You’ll be more prepared for the application procedure if you have these materials on hand. Keep in mind that the application and approval process can take anything from a few business days to several weeks, depending on the lender.
Heavy Equipment Loans: Maximum, Terms and Rates
Rates and terms will vary depending on your qualifications and market conditions, as they will with any type of financing. When looking for an equipment loan, below are some examples of equipment financing rates and terms.
It’s critical to examine the whole cost of the loan and payments when evaluating loans, especially equipment loans for a beginning firm.
Lenders will typically have their own equipment financing criteria, including terms and eligibility restrictions. Let’s look at how different fees for an equipment loan are calculated.
Equipment loan rates, terms, and quantities are determined by a number of factors. Lenders typically evaluate loan acceptance and terms by assessing the risk of lending to a particular applicant.
In order to qualify for equipment financing, banks often require that a company has been in operation for at least two years and has a large yearly revenue.
Alternative lenders, such as those who provide online business loans, may have different requirements and may be able to help borrowers with newer firms or poor credit histories. A good credit score, a substantial down payment, and collateral will usually result in better interest rates and loan terms.
The following is a general range of interest rates and terms: Typical interest rates range from 2% to 20%. Loan terms: Up to ten years, but this can vary depending on the credit history of the applicant and the type of equipment being financed.
Equipment Loan Return On Investment
Consider the return-on-investment (ROI) and how the equipment will benefit your firm in the short and long term before signing for a business equipment loan. Here are some issues to consider when determining how the equipment can benefit your company:
- What are your company’s short- and long-term gains and objectives?
- How important is the equipment to the company’s overall success and revenue?
- Is the monthly payment more than the equipment’s financial benefit?
- What is the expected lifespan of the equipment? Is it longer than the period of the loan?
- Is the equipment going to be obsolete in a few years?
Some lenders may levy origination costs, application fees, or early repayment fees, similar to other types of personal and business loans, which might affect your ROI estimates. Consider asking questions and comparing lenders to see which one provides the best equipment financing for your company.
Equipment Financing Pros and Cons
An equipment loan is usually the financing option with the lowest interest rate.
You’ll own the equipment outright.
At tax time, the interest you’ve paid is deductible, and you’ll also enjoy a depreciation tax benefit.
Can help you build business credit
Can be an affordable option, especially if you opt for a secured loan
Can allow you to get the equipment you need for your business in order to grow
If the financed equipment becomes outdated, you’ll need to sell or dispose of it.
An equipment loan may require a high initial down payment.
More expensive than saving up to buy the equipment outright
Payments can be a hindrance on your business cash flow until the loan is paid off
Can seriously damage your credit or even put you out of business if you can’t make the payments
What’s the Difference Between Equipment Financing and Leasing?
Who owns the equipment is the key distinction between equipment financing and equipment leasing. The equipment is owned by the business owner at the end of the loan period with equipment financing. The lender owns the equipment and rents it to the lease holder through equipment leasing. Because you don’t own the equipment, it can’t be used as security, making this sort of borrowing riskier for lenders. If your business relies on equipment that needs to be repaired or replaced on a regular basis, you might want to consider leasing it. With an equipment lease, you rent the equipment for a fixed amount of time from a lender (e.g., a bank, an equipment distributor, or a leasing business). You have the option of renewing or purchasing the equipment at the end of the lease, or simply walking away. Business owners that don’t have collateral, don’t want a personal guarantee, and/or don’t have a down payment to assist secure the loan may benefit from equipment leasing. It may be easier to qualify for an equipment lease than for a business equipment loan, depending on the borrower’s credit history. Consider the amount of time you expect to require the equipment when deciding between a lease and a loan. If you’re leasing for a longer period of time, leasing may be less expensive than buying, especially if you’ll be using the equipment for years to come.
Equipment Leasing Option
Leasing is a popular financing option offered by many companies.
Leasing equipment can help you save money and get the most out of your investment. For example, as a piece of equipment ages, it becomes less valuable and productive, thus leasing it for a limited time may be a wise decision.
Some finance organizations also allow you to purchase the equipment at current market value.
If you plan on using the equipment for a long period, leasing is usually more expensive than buying. Leasing is “likely the preferable option” for equipment that will be used for 36 months or less, according to the Equipment Leasing and Finance Association. It’s more cost effective to acquire if you’ll be using it for a longer period of time.
Industrial Equipment Financing in Texas
Large pieces of machinery that need a major investment are typically classified as industrial equipment. Equipment loans may be used in the agricultural, construction, and industrial industries for the following purposes:
- Irrigation systems
- Production line machinery
- Cement mixers
- Threshing Machine
- Logging Machinery and Equipment
Equipment Financing FAQs
Is it hard to get financed for equipment?
It’s easier than you would think to qualify for equipment financing. You’ll typically need to have been in business for at least a year, have annual revenue of $50,000 or more, and a credit score of 650 or higher. It’s not as tough to obtain as other types of financing because the collateral is generally included in the loan.
What are equipment financing rates?
The rates on equipment financing typically range from 4% to 40%. Interest rates vary, but they are normally reasonable. The bottom end of the range has rates that are similar to bank or SBA loans. Taking the Section 179 business tax deduction could help you save money.
What are the benefits of equipment financing?
For business owners, equipment financing offers various advantages, including increased working capital, the ability to use the best equipment, tax benefits, the potential to free up other lines of credit, and a simple application procedure.
Do banks do equipment loans?
Many banks, credit unions, and online lenders offer equipment loans for computers, office furniture, machines, vehicles, and other items. Rates for equipment loans start at 5.49 percent, with loan amounts ranging from $500,000 to $5.5 million.
Are equipment loans amortized?
Equipment loans are appropriate for businesses who are certain they want to buy the equipment at the conclusion of the loan and want a regular amortization schedule with no balloon payment at the end.
What is an equipment lease agreement?
An equipment leasing agreement is a contract in which the lessor, who is the owner of the equipment, agrees to let the lessee use it for a set length of time in exchange for regular payments.
What is EFA loan?
An equipment finance arrangement is a loan between a small business and a specialized lender that allows for a one-time payment on equipment purchases. EFAs, unlike equipment leasing programs, allow a company to own its equipment outright once the loan is paid off.