Equipment Financing Guide
Equipment financing simply refers to any funding solution that is specifically designed for purchasing equipment.
Your business borrows money from a lender, makes capital purchases, and makes payments towards the debt over time.
While equipment financing does typically require collateral, the items that you purchase with the borrowed money is often enough to secure the loan. This can make these loans much easier to qualify for than traditional business loans.
In some financing agreements, your lender may also impose a blanket lien on your business, which would allow them to claim any of your business’ assets in case you default on the loan.
Financing vs. Leasing
The difference between equipment financing and leasing comes down to one primary factor: ownership.
With financing, your business borrows money to purchase items. Once your debt is repaid, you retain full ownership of the purchases.
<>Leasing, on the other hand, essentially involves paying rent on a piece of machinery or otherwise for a certain period of time. At the end of your lease, you can choose whether or not to renew the agreement, or you can often purchase the items at a discounted price.
Leasing allows you to avoid making any down payments, and you don’t have to put up any collateral. However, leasing means you don’t actually own the items until you decide to purchase it.
Depending on how long you need a lease, it could be more expensive than purchasing the items outright.
Equipment Financing Options
Small businesses that need funding to purchase machinery have several options to choose from.
These are great for new small businesses that need to purchase expensive items to expand.
With these loans, the purchases serve as collateral for the loan — making it easier to get the funding for the total cost.
Repayment periods can be anywhere from three to 10 years, loan limits can be as high as half a million dollars, and interest rates are very moderate.
The Small Business Administration 504 loan program allows for-profit businesses to borrow up to $5 million to purchase land, equipment, real estate, and more.
Interest rates for these loans are often lower than other types of business loans. However, it can take as long as eight weeks to receive financing.
For businesses that need to borrow a very large sum of money to finance their purchases, this may be the best option available.
Term loans include short-term and long-term business loans. While these are not specifically designed for purchasing durable goods, they can be used for this purpose.
Terms loans can be great for businesses that need to borrow more than is offered by equipment loans.
Term loans are available from a very wide range of lenders, can be easy to qualify for, and offer very competitive interest rates.
The requirements for equipment financing depend on your lender and the type of loan. That being considered, there are some basic requirements you should be prepared for:
- Credit score of at least 600
- At least one year in business
- Ability to make a down payment
- Ability to demonstrate sufficient business revenue
It’s important to review your lender’s terms before applying to understand the specific eligibility requirements that you need to meet.
How to Apply for
Applying is a very simple process. Just follow a few steps to get started.
Determine How Much You Need
First and foremost, you need to determine how much money your business needs to borrow.
Make a detailed list of all of the items you need and contact suppliers to get quotes.
You will need this information to submit to lenders as part of the application process. It will also help you determine which type of loan will meet your business’ needs.
Find a Lender
Be sure to research and compare quotes and terms from several different lenders. You should understand what additional fees you are responsible for, what happens if you default on your loan, and anything else required by your lender.
If you’re applying for an SBA loan, you can use the SBA’s Lender Match tool to quickly find suitable lenders near you.
Complete Your Application
After finding a suitable lender, be sure to review the documents you need to submit before beginning your application. This will likely include:
- Bank statements
- Tax returns
- Business licenses
- Financial projections
- Sales figures
- Personal identification
- Your SSN and EIN
- And more
After being approved, review your agreement one last time to ensure you understand and agree to the terms.
Based on $100,000 loan with 12% interest over 72 months