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Equipment Financing for Small Business
Written By: Leslie M.

Before you buy equipment for your small business, make sure you consider all appropriate options for small business equipment financing.

If you operate a small business, you know that it feels like there is always something you need to buy. For example, you might need new computers for the office, a new industrial-sized air fryer for your empanada catering business, or display racks for your clothing boutique. But it’s something you need now, either to continue with your current operation or to grow to the next level. 

What’s the best equipment financing for small business?

Your company may have a cash flow challenge, but you can still get the funding to buy the equipment you need for your company. You have some excellent options to consider, and it’s a good idea to take the time to research your alternatives. For example, you may want to consider a business loan, a business credit card, or a business line of credit. All of these have advantages and disadvantages you should investigate. 

One common option when you need equipment financing for a small business is a loan specifically for the equipment. That financing could come from the equipment dealer or retailer, or a financial institution like a bank, credit union, or online broker. Which choice is optimal for your circumstances is the part you have to investigate.

How does equipment financing for small business work?

In many situations, the equipment you need can serve as collateral for the loan you obtain to get it. So, if you need a $20,000 convertible scaffold for your painting business, the scaffold is used to secure the loan. If you don’t pay as agreed, the lender can repossess the scaffold you bought and sell it to recoup their investment.

In reality, if you buy new equipment, once you start using it, the value falls below what you paid, so the lender may not get all their money back. Furthermore, the lender is in the lending business, not the painting business. They really don’t want to reclaim, appraise, and sell your scaffold (or any other equipment.) It’s a hassle, and they won’t come out even or ahead. The lender wants to loan money to a business that will pay it back as agreed. 

What is the best approach?

To find the best equipment financing for small businesses, consider a loan broker that will help you uncover the possibilities you might otherwise miss. Don’t overlook the bank your company works with for your checking and other credit needs, but don’t stop there. Consider online lenders, credit unions, and even dealer financing. 

Your equipment financing could be a short or long-term loan. It depends partly on what you are buying and how expensive it is. For example, if you purchase something that will depreciate (lose value and usefulness) very quickly, you will probably only be able to obtain short-term financing. That’s why buying office equipment with short repayment periods is typical. The lender doesn’t want the computer to be obsolete even before you finish paying the loan off. 

In contrast, equipment financing for small businesses can be obtained for a longer-term if the items you need are durable.

How much does equipment financing for small business cost?

The rate and terms you can get for equipment financing will depend significantly on your credit. That means your company credit and, most likely, your personal credit status as well. If you own and operate a small business, the lender will rely on your individual creditworthiness at least as much as on your company’s financial history. However, you will still need to present detailed financial statements, including profit and loss, for the company. It may also be wise to submit your business plan, particularly if the new equipment will help you expand or improve operations. 

Interest rates for small business equipment financing cover a wide range. For example, you might get an interest rate as low as four percent with outstanding credit, or you could pay as much as thirty percent if you have some significant blemishes on your company or personal credit report. 

Do I need a down payment to get the financing?

The answer to this depends partly on your credit, the type of equipment you need, and the lender, but the short answer is “most likely.” Lenders like down payments (just like car dealers) because that helps protect them if you default on the loan. If less than the total value is at risk, collecting is easier. In addition, if you have put money in, you are more likely to be committed to the financing.

Don’t look at the down payment as a disadvantage because it may help you obtain better financing terms for the equipment your small business needs. Plus, you can use a reasonable down payment to lower your payments overall. This method will help even more if you don’t get the best interest rate.

What are the advantages?

One potentially significant advantage of getting small business equipment financing is that you will improve your credit ranking if you successfully make the payments on time. If it’s already good, it will get better, and if it is mediocre or worse, successfully discharging the loan can provide a boost. Your next loan, line of credit, or financing will likely have better terms, saving you money in the future. 

If the equipment is heavy and durable, you may also gain a tax deduction for depreciation. Talk to your accountant about that, but consider it when calculating affordability. You may also be able to deduct some of the loan interest from your business income. That’s another topic for your accountant. 

Being responsible about how you borrow for your business is one way to foster financial success. If you carefully review the options before deciding, you will be on the path to growth and success for your business. 

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