As a business owner, having the necessary equipment is critical to building a thriving enterprise. But finding the funds to purchase equipment can be cumbersome and challenging. Equipment financing can help ease the burden of securing funding for your equipment and allow you to take the next step in growing your business. Here’s how it works and how you can secure the financing you need.
What is Equipment Financing & How Does it Work?
Equipment financing is a loan used to purchase equipment and machinery for your business.
Because of how costly some equipment can be, obtaining funding might be the only option for many business owners.
Similar to other loans, equipment financing works by using the equipment as collateral for the loan in which monthly installments are made until the principal and interest have been paid-in-full over a fixed term.
To better demonstrate how equipment financing works, we can use a gym as an example. Because of how expensive some pieces of equipment are, you can use gym equipment financing to obtain the funding you need to run a profitable gym. In many cases, lenders will loan between 70% and 100% of the equipment purchase price. So if a gym purchases a new set of weights that costs $25,000 – most lenders will finance between $17,500 and $25,000 of your purchase. This allows the gym to retain essential cash that’s needed to run the day-to-day operations of the business.
In this scenario, the gym owner would pay monthly on the equipment that’s calculated using the current interest rate, repayment terms, and the overall amount of the loan.
How to Get Equipment Loans for Your Business
To get an equipment loan for your business, you should start by taking a look at the requirements below. Once you ensure you meet the requirements and have the proper documentation, you can get in touch with a loan broker like Llama Loan who can provide an abundance of competitive options to secure the capital you need.
You can check out this financing equipment calculator for more help determining your needs.
Ready to secure your equipment financing? Get in touch with Llama Loan today!
Equipment Financing Rates
As with all loans, interest rates on equipment financing can fluctuate from day to day and from lender to lender.
Equipment financing rates can range from 4% to over 30% – depending on a multitude of factors.
The life of the equipment, the creditworthiness of the borrower, and the lender all play a role in determining the rate you will pay.
Equipment Financing Terms
The terms of your equipment financing can vary from lender to lender and the type of equipment being financed.
Lenders will analyze the useful life of the equipment to determine how long the loan terms should be.
Payment terms can range anywhere from two years to over twenty years. In most cases, it’s common to have loan terms between two and seven years.
Equipment Financing Requirements
The requirements for heavy equipment financing and other equipment financing options will vary from lender to lender.
Whereas some lenders will be more lenient in what is allowed, others can be more strict.
In general, here are some of the equipment financing requirements you should consider:
- Business and personal credit scores. As with most financing options, your personal and business credit will be used to calculate the interest rate on your loan. While you can get bad credit equipment financing, this is accompanied by a higher interest rate. There is no set credit score needed to be approved for equipment financing, but having a score above 650 can be beneficial.
- Business plans and history. Lenders will often analyze business plans and trajectories for your enterprise for them to deem the business as legitimate and creditworthy. Some lenders will require your business to have two full years of history, and some may require certain revenue numbers to qualify.
- Profit and loss statements. Lenders will also want to see the financial history of your business in the form of profit and loss statements.
- Personal income statements. Including tax returns, bank statements, and personal balance sheets.
- Cash for a down payment. Because equipment loans will typically require a down payment, you need to obtain proof of funds to pay the down payment.
Supports cash flow objectives.
Because you won’t have to shell out 100% of the equipment cost at once, you can easier reach your cash flow goals.
Builds business credit.
As you make payments on your loan, your business credit will subsequently increase, opening the door for future opportunities.
Funding speed.
Some equipment financing options can give you access to capital in as little as seven business days.
Many accessible funding options.
Because some equipment financing can be completed by using an SBA 7(a) loan, the door is opened to many potential borrowers that wouldn’t otherwise be approved.
Potential tax advantages..
Because loan interest can lower your taxable income, using equipment financing can help reduce the amount you owe come tax time. Additionally, heavy equipment can be depreciated, offering even more tax savings.
Equipment financing is often self-collateralizing.
Lenders are able to use the equipment as collateral instead of relying on personal and business assets that can delay the process.
Equipment financing can be costly in some cases.
Depending on the loan's structure, some financing options can cost a considerable amount in interest payments.
Down payments are often required.
While some lenders may offer financing for up to 100% of your equipment, these lenders frequently come with higher interest rates. For most loans, you will be required to pay a portion of the purchase price upfront – which can be costly.
It can hurt business credit.
If you fail to make payments on time, your credit can diminish and make it difficult to be approved for credit in the future.
Equipment Financing vs. Equipment Leasing
Equipment leasing is another option that some lenders may offer as a way to obtain the equipment you need. While equipment leasing can be a more economical way to obtain equipment upfront, it is often more costly in the long run. Equipment leasing is best left to businesses that do not have cash available for a down payment or for equipment that rapidly becomes obsolete.
Is Equipment Financing Right for your Business?
Equipment financing can be a stronger option than leasing on many occasions. However, there are some instances in which equipment leasing might be considered. The most important consideration is the useful life of the equipment. For equipment that quickly becomes obsolete or is depreciated, equipment leasing could be a wiser option. However, in most other scenarios, equipment financing can be a more economical choice.
If you’re searching for other funding options for your equipment, you can also consider invoice factoring – which provides a lump sum of cash in exchange for future invoice payments on completed work.
The Bottom Line
Equipment financing for small businesses can be an essential tool that provides business owners access to capital needed to fund or operate their businesses.
Whether your equipment has become outdated, been decommissioned, or you need an entirely new piece of equipment, using equipment financing can be a smart method of obtaining funding.
They offer swift funding options and the ability to finance up to 100% of the purchase price of your equipment, which can aid your business’s cash flow.
Ready to obtain financing for your equipment needs? By using a broker like Llama Loan, you can access the most competitive loan options available.