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Intro To Equipment Financing Loans
Are you a small business owner wondering how to get expensive equipment with a low or no down payment? Or without paying high rates? You don’t need a heap of cash reserves. You can do it with the help of Equipment Financing. Small business owners now have many options when financing equipment, not just the local bank.
With business equipment loans, you can enjoy small monthly payments almost as if you were leasing. Better yet, once the balance is paid off, the equipment is yours.
Most small business owners have something in common, and that’s equipment cost. Whether we’re talking about upgrading it or breakdowns, it costs money to maintain and can put a strain on your cash flow.
The approval rate to get equipment financing with online lenders and even local banks like Wells Fargo and Bank of America is among the highest of all funding products. Typically, it’s hovering around 80%. The application process and repayment terms are simple and straightforward. The paperwork needed is minimal. Best of all, you can get funded in a matter of days, with a low or no down payment, and enjoy low rates (starting at 5%), which in most cases is tax-deductible.
In this guide, we’ll answer the following questions and more:
What Is Equipment Financing and Who Is It For?
The equipment financing option is very similar to a term loan, the only difference being it’s specifically for purchasing equipment. Because equipment financing is so advantageous, small business owners can purchase what they need with a low or no down payment, easy repayment terms, and without being forced to pay steep interest rates.
Equipment loan online lenders and even the local lender will allow the borrower to use the asset as collateral, so they’re protected; thus, the rate is lower and could make the loan amount higher. All of these points can help cash flow when new equipment is needed.
How much can you borrow with business equipment loans?
Typically, the small business can get up to 100% of the loan amount needed to buy the desired equipment. In some cases, a down payment may be required. Since the asset is used as collateral, the interest rate would be lower than other options like unsecured business credit lines, invoice factoring, merchant cash advances, or another type of business loan.
How Does Equipment Financing Work?
Equipment financing works similar to a term loan with regard to payment options. Every month you pay a fixed payment (including principal and interest) until the principal balance is paid in full. In the end, the equipment is yours.
With the business equipment loan options available, you can borrow up to $5 million per piece, perfect for heavy equipment financing. The interest rate starts as low as 5%. To qualify for financing equipment, you need to have a 600+ personal credit score.
Businesses can get equipment financing to purchase:
- Construction equipment (Other heavy equipment)
- Landscaping equipment
- Dog grooming equipment
- Chairs for hair salons or beauty spas
- Restaurant equipment (ovens, freezers, etc.)
- Please inquire about other business assets!
As mentioned above, with business equipment loans, the asset is the collateral; that’s why the interest rate starts this low.
For the equipment loan finance company to find out the value, they may ask for information, including the purchase price, age, seller, and manufacturer info, among other items. The lender needs this info to make sure they can recoup their investment in case of a default.
Example of Business Equipment Financing:
Let’s say you’re a baker. To increase your cupcake productivity by 3x, you need an industrial oven, which costs $75,000.
You can negotiate a five-year term with as low as 5% interest by applying for an equipment loan. Again, because you’re using the oven as collateral, you’ll get a lower rate and potentially higher loan amount than you would with other funding products.
After making your regular loan term payments for five-years, the balance is paid off, and you own the equipment outright.
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Equipment Financing Is the Go to Source for Growth
- According to the 2019 Small Business Credit Survey, auto loans and equipment loans have the highest approval rating of any lending product to small businesses. Around 80% of applicants looking to finance equipment were approved.
- 60% of U.S. small business owners turn to equipment leasing and financing to help them operate smoothly and grow steadily. This info comes directly from the Equipment Leasing and Financing Association.
- In January 2020, the approval for funding was 76.3%, according to ELFA’s Monthly Leasing & Finance Index. This means that every three out of four applicants got approved for an equipment loan.
- U.S. companies borrowed 18% more money in September 2019 than they did in September 2018, says the ELFA. This was all spent on capital investments (such as equipment).
- The Equipment Leasing and Financing Association says that as of 2019, this is a $1.8 trillion market.
What Are the Advantages of Equipment Financing?
For a small business to get larger loan offers with low interest and a longer-term, they generally need collateral. This is understandable as equipment loan finance companies want to be sure that their risk is minimal in the case of a default. By simply using the equipment as collateral, the lender will grant favorable terms for their equipment loans. This is possible even if the credit score doesn’t rival a blue-chip company or the annual revenue isn’t in the seven-figure range. As a matter of fact, a lender (or bank) might even overlook a company’s young age with collateral in the picture. With equipment loans, the purchased asset acts as collateral. For this reason, even businesses with a subpar credit rating, an imperfect balance sheet, imperfect cash flow or less than two years of activity can apply.
On the other hand, if the same company would apply for a standard term loan, the situation would be different. They would have to pay higher rates in shorter terms only because they don’t have collateral to reduce the risk.
Financing equipment also allows you to own the asset, as opposed to leasing. Though equipment leasing has its advantages, there’s a good chance that it will cost more money than purchasing in the long run. You’ll find out more about this in a bit.
Also, keep in mind that the primary purpose is to avoid paying the entire cost upfront. Instead, you make monthly payments, which helps cash-flow.
Did you know that interest payments are usually tax-deductible? It’s a major selling point for many businesses. Although lease payments may be tax-deductible, why not own it instead?
What Are the Disadvantages of Equipment Financing?
With all the benefits, an equipment loan also comes with several risks.
The first concern would be about new equipment becoming outdated over time. It’s a valid concern. Nobody can predict what the future holds or what their annual revenue will be. Industries are evolving at an accelerated pace. It would mean that by the time equipment loans are paid off, the asset might be worthless. The worst-case scenario would be that the asset would lose most of its value while still paying off the equipment loan. In these cases, equipment leasing would’ve saved more money.
Another drawback would be fixing the equipment when it breaks down. If you own it, you have to fix it. On the other hand, if you’re leasing, then the equipment leasing company handles the maintenance and repairs.
The final drawback is the interest you have to pay on the term loan. It costs more going down this road than buying it outright.
As you can see, equipment loans have a few drawbacks and many benefits, so this is why it’s a good choice for certain companies who are ok with the loan terms and a bad one for others.
- Get access to funds quickly
- The approval process is easy
- Less than perfect credit score accepted
- The asset is used as collateral
- Borrow up to 100% of market value
- It might be obsolete before the loan is repaid
- Depreciation may prevent from deducting full costs on tax returns each year
- Possible prepayment penalty
Equipment Financing Loan Terms Compared To Other Products
|Loan types||Max Amounts||Rates||Speed|
|Merchant Cash Advance||$5k – $1m||Starting at 1.09||1-2 business days|
|SBA Business Loans||$50k-$10m||Starting at 3.75%||3-5 weeks|
|Business Term Loan||$10k to $5m||Starting at 5%||1-3 business days|
|Business Line of Credit||$1k to $450k||Starting at 1% p/mo||1-3 business days|
|Receivables/Invoice Financing||$10k-$10m||Starting at 1% p/mo||1-2 weeks|
|Equipment Financing||Up to $5m per piece||Starting at 3.5%||3-10 business days|
|Revenue Based Business Loans||$10K – $5m||Starting at 1% p/mo||1-3 business days|
Who Qualifies For Equipment Financing?
Approved small business owners generally met the following criteria:
How To Apply For Equipment Financing:
The application process is quite fast and our 1250+ 5 Star reviewed customer service makes it simple. First, the process with most online lenders takes 3-10 business days, depending on the loan terms & amount.
Here are easy steps you can follow to apply:
Step 1: Make Sure Purchasing is the Right Move
For some companies, it’s easier and better to make a lease payment than to own. So before applying, make sure you ask yourself these questions:
- What is the likelihood that the equipment becomes outdated soon?
- Will you need this equipment for several years from now?
- Is this purchase so vital that it’s worth the interest payments?
- Do you intend to use the equipment for your business long term?
This will help us determine the right terms for the equipment loan or if you should even purchase equipment at all. You should also make sure you know the current market value and final invoice price. This will ensure that you request the right amount.
Step 2: Gather Your Documents
Applicants must provide the following information and documents:
- Driver’s license
- Voided check
- Bank statements from the past three months
- Invoice for equipment
Step 3: Complete Application
The application process is fast, and you can do it within a few minutes. You can either fill out our one-page online application. Or call us to guide you through the process.
Step 4: Speak to a Representative
Once we receive your application, a senior account executive will reach out to you. On this call, we’ll go over your best equipment financing options and loan offers. You will get absolute transparency. There are no hidden fees or surprises. You will know exactly what payment options, rates, and terms you can expect for the equipment financing option you choose.
Step 5: Receive Approval
When your application passes underwriting guidelines and gets credit approval, your term loan gets set up. Next, the cash gets sent directly to the merchant. Depending on what’s convenient for you, we’ll either help you set up automatic payments, or you can arrange to pay by check/electronic payment.
Your Business Loan Gets Set Up – Now What?
Your term loan isn’t just a way to get financing. It’s also an excellent opportunity to start building (or improving) your credit.
How do you get the best rates and terms on your future working capital loan?
The rules are quite simple. It can’t be emphasized enough, regardless of the type of small business loans you get, to make all of your required payments on time and in full. If you get a business credit line or another form of revolving credit, keep your balance well below the credit limit. These steps will positively impact your personal credit score as well as the business credit score. And that means preferred rates and terms the next time you need business financing.
What If I’m Declined For Equipment Loans?
If your application gets declined for financing, we may recommend another product to fit your needs. With this secondary option, you will be able to purchase equipment. However, the terms might not be as favorable. It will mean a slightly higher interest rate and shorter term. Possible examples include term loans or other types of small business loans.
Your application may have also been declined due to a poor credit score. In this case, we may recommend a business credit card, a personal loan. Both of these options are much easier to qualify for than small business loans. You should also consider credit repair services. These services can raise your score by focusing on the credit standards that are keeping it down. You can also try your local credit union to see what options they can offer.
People Also Ask:
How Do I Decide To Purchase or Lease Equipment?
The main factor to consider is how long you plan on using the equipment. If you plan to use it for at least 36 months, purchasing will likely cost less than an equipment lease. On the other hand, you wouldn’t want to buy something you’re only going to use for a year or two. For this reason, lease terms are often recommended for industries that depend on the latest, most up-to-date equipment.
It’s also important to understand that, just like financing, a lease agreement is still considered debt. This could potentially impact your ability to access commercial mortgages, a Business Line of Credit, or trade credit from vendors.
Can I Get Financing On Used Equipment?
Some lenders have buy-back programs in which they purchase the equipment at the end of the loan term. And since equipment often serves as collateral, lenders might become the new owner of a piece of equipment following the borrower’s default. In these cases, you may be able to finance used equipment. Just make sure to note the service provider for the equipment. Because the equipment is used, you never know when it may need repairs.
What Type of Equipment Can a Small Business Owner Finance?
At UCS, we finance everything from vehicles to cloud computing software to manufacturing and medical equipment. Need a restaurant oven? We can do that too. If we conclude that we cannot finance your desired equipment, we may recommend another business funding product that would still provide the necessary capital.
Why Do Companies Choose To Finance Equipment?
In most cases, businesses prefer financing equipment because it makes more financial sense than leasing. Financing equipment also allows the company to use its own money for other purposes, like marketing, hiring, etc.
Here are some reasons why companies choose to finance instead of leasing:
- You don’t have the cash. – If you’re eager to buy a new piece of machinery but don’t have the money on hand to make the purchase.
- You don’t want to use up your other forms of credit. –Some businesses also use this type of business credit instead of making purchases on a business credit card or credit line. Buying machinery or equipment using a loan lets companies keep their credit cards and credit lines available for other day-to-day purchases or emergencies.
- You’re in a hurry to grow. – Investing in a new piece of machinery can help companies to grow quicker. Working more efficiently, expanding product lines, and taking on newer and larger clients are just some of the reasons companies choose equipment financing.
- Your most important piece of machinery broke down. – If you need to replace it fast, equipment financing could get you the money you need in days.
- Your equipment needs to get replaced frequently. – If your business is already multiplying, you might find that your machinery gets worn down faster than you expected.
- Advances in technology make your current equipment obsolete. – Some industries need to invest in the latest equipment fairly often to stay competitive because of rapid technological advances.
Is Business Equipment Financing Tax Deductible?
Yes, interest payments are usually tax-deductible. However, you should never assume that this is the case before making any commitments. Talk to a tax professional to make sure you will indeed receive tax breaks.
Do Some Manufacturers Offer Financing?
Many heavy equipment manufacturers offer to finance their products. However, these programs might feature high equipment financing rates. And since you’re not using the equipment as collateral, the manufacturer might assign a higher rate to offset the risk.
Also, financing programs only allow purchasing the equipment. You don’t get to borrow a little extra money to cover the attached costs. As any business leader knows, all major purchases naturally create additional expenses. With Equipment Financing, you can negotiate with lenders about borrowing enough money to purchase the equipment and cover extra costs.
Can I Get Equipment Financing with Bad Credit?
Yes, this product is available to borrowers with a bad credit score. Since the equipment is being used as collateral, your credit score will only have a minor impact on your interest and terms. Still, the lowest possible rates are typically given to borrowers with higher credit scores.
Is it better to go with new or used equipment?
Going with new or used equipment depends on the business and case by case basis. In most cases, it’s preferred to choose new equipment. Even though it’s more expensive, it has a longer lifespan. In certain industries, small business owners have to keep pace with technology. Going new could increase productivity or reduce consumption, which is important in a cutthroat business environment. Used equipment can be a good choice in certain circumstances. For example, when the borrower defaults, the lender (or bank) seizes the equipment and needs to unload it to recoup their principle. This is the most common way to buy used at a discount.
Can a small business get financing for construction equipment?
YES! you can get financing for construction equipment and other types of heavy equipment. This funding product behaves similarly to any term loan for a small business. The loan may require a down payment and a lien on the equipment as collateral to get started.
How do you get the best financing option for construction equipment?
When small business owners are checking out financing options for construction equipment or other business needs, it’s best to have a high credit score. The better the credit score, the better loan options they will get. To get started, business needs have to be established. Then it can be decided if it’s the right choice to get new or used equipment. In most cases, new equipment is the only option. Best of all, a great financing option could run for 10 years. A good funding expert can get the best rates for various small business loan options.
Can you get an equipment loan for a credit card payment processing app or POS software system?
Yes, equipment financing can be used to get either a credit card payment processing app or a credit card POS software system. These equipment financing options are similar to any term loan or small business loan. To get started, you have to decide if you will lease or buy the credit card payment processing equipment outright through a financing option. It’s easy to get started and get the capital your business needs. Online lenders may require a 600+ credit score.