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Intro To Equipment Financing Loans
Equipment Financing is a very unique and advantageous type of business loan. It makes several aspects of applying for business loans much more straightforward, including the need for collateral, how much to borrow, and the length of your terms.
Equipment is among the most significant and most common expenses for small businesses, so it only makes sense that a business loan was created solely for this purpose. The specificity of Equipment Financing also makes it much easier to qualify for. If you run a smaller business and you need expensive equipment, this is almost certainly the first option you should explore.
In this guide, we’ll answer the following questions:
- What Is Equipment Financing?
- How Does Equipment Financing Work?
- What Are The Advantages of Equipment Financing?
- What Are The Disadvantages of Equipment Financing?
- How Do You Apply For Equipment Financing?
- What If I’m Declined For Equipment Financing?
- How Do I Decide To Purchase or Lease Equipment?
- Can I Get Financing On Used Equipment?
- What Type of Equipment Can I Finance?
- Why Do Companies Choose to Finance Equipment?
- Is Equipment Financing Tax Deductible?
- Do Some Manufacturers Offer Financing?
What Is Equipment Financing?
Equipment Financing is essentially a term business loan used to purchase equipment. Since the equipment is usually costly, Equipment Financing allows small businesses to access higher amounts by using the equipment as collateral. Thus, the borrowing amount is directly based on the equipment’s price. The terms are also based on how long the business expects to use the equipment.
Thanks to the collateral, business lenders might offer lower interest rates for businesses with subpar credit. This form of financing gives businesses up to 100% of the cash needed to buy equipment, at a lower rate than some other forms of borrowing, such as unsecured business credit lines, invoice factoring, or merchant cash advances.
How Does Equipment Financing Work?
The repayment structure is the same as a Business Term Loan. In most cases, you make fixed monthly payments (plus interest) over a set term. Interest rates start at 5%, with terms of up to five years. You can borrow up to $5 million, and the minimum credit score is 600.
Equipment Financing can be used to purchase many types of equipment, including
- Construction equipment
- Landscaping equipment
- Dog grooming equipment
- Chairs for hair salons or beauty spas
- Restaurant equipment (ovens, freezers, etc.)
Since the equipment is being used as collateral, the business lender may need extensive information to determine its current value. This information includes the purchase price, age, seller, and the company that makes the equipment. The business lender will also use this information to confirm that in the event of a default, selling the equipment would allow them to make back most of the money.
Example of Financing Equipment:
Some business owners prefer this type of financing over other forms of business credit because it Here’s a quick example of when to use equipment financing.
Let’s say purchasing a $75,000 industrial oven meant that your business could bake three times as many cupcakes as you can now. You apply for financing, and negotiate a five-year loan at 5% secured against the oven. You’ll make regular payments for the next five years, and then your loan will get paid off. The lender will no longer have a legal interest in the oven.
Recent Facts, Figures & Reports on Equipment Financing
- This type of lending is big business. The Equipment Leasing and Financing Association says that as of 2019, this is a $1.8 trillion market.
- According to the 2019 Small Business Credit Survey, auto loans and equipment loans have the highest approval rating of any type of lending to small businesses. A full 80% of applicants looking for a loan to finance equipment or vehicle purchase was approved.
- The Equipment Leasing and Financing Association says that equipment leasing and financing provide funding for about 60% of U.S. businesses trying to get the production assets needed to operate and grow.
- In February 2020, credit approvals for equipment financing totaled 74.7 percent, according to the ELFA’s Monthly Leasing & Finance Index. This figure fell from 76.3 percent in January. And at the same time, the total number of dedicated equipment finance companies was down 3.1 percent year-over-year.
- U.S. companies borrowed 18% more money to spend on capital investments (such as equipment) in September 2019 than they did in September 2018, says the ELFA.
What Are The Advantages of Equipment Financing?
Business lenders often require collateral in exchange for high borrowing amounts, low interest rates, and long terms. Collateral dramatically reduces the risk of not being paid back. Thus, if you can provide collateral, the business lender might overlook areas where you fall short, like credit score, annual revenue, or time in business.
With Equipment Financing, the equipment acts as collateral. For this reason, businesses with subpar credit or less than two years in business can access the three advantages mentioned above. If the company applied for a standard Business Term Loan, it would likely face high rates and shorter terms due to the inability to provide collateral.
Equipment Financing also allows the business to own the equipment, as opposed to leasing it. Though leasing does have its advantages, there’s a good chance that in the long run, leasing will cost more money than purchasing. We’ll explain why later on.
It’s also important to remember that the primary purpose of Equipment Financing is to avoid paying the entire cost of the equipment up front. Instead, you make monthly payments, which is much more affordable. You get to purchase the equipment but use the same payment system as leasing.
Lastly, much of the appeal for Equipment Financing stems from the fact that the interest payments are usually tax-deductible. Lease payments may be tax-deductible as well. But if you can deduct it, why not own it?
What Are The Disadvantages of Equipment Financing?
Equipment Financing comes with several risks. First, is the concern about equipment becoming outdated over time, which is very common. Industries change, so you never know how valuable certain pieces of equipment may be in the coming years. In other words, there’s always a chance that the equipment you purchase may soon become irrelevant or obsolete. Your equipment could even begin to lose relevance while you’re paying off the loan. If the equipment loses value much faster than you imagined, you would have saved more money had you chosen to lease instead.
Also, owning the equipment means you’ll have to fix it yourself. When you lease, the leasing company is responsible for maintenance or repairs. Fixing equipment only makes sense when you plan to use it for a long time. There’s a chance that when your equipment needs repairs, you’ll have to choose between fixing it or purchasing a newer, more advanced model.
And since Equipment Financing includes interest, you’ll end up paying more money than you would have if you purchased the equipment yourself.
- Get access to funds quickly
- Approval process is easy
- Less than perfect credit accepted
- Equipment is used as collateral
- Borrow up to 100% of equipment value
- Depending on the equipment, might be obsolete before the loan is repaid
- Equipment depreciation may prevent from deducting full costs on tax returns each year
- Possible prepayment penalty
Equipment Financing Compared To Other Products
|Loan types||Max Amounts||Rates||Speed|
|Merchant Cash Advance||$7.5k – $1m||Starting at 1.09||1-2 business days|
|SBA Loan||$50k-$10m||Starting at 5%||3-5 weeks|
|Business Term Loan||$10k to $5m||Starting at 5%||1-3 business days|
|Business Line of Credit||$10k to $250k||Starting at 8%||1-3 business days|
|Receivables/Invoice Factoring||$50k-$10m||Starting at 5.8%||1-2 weeks|
|Equipment Financing||Up to $5m per piece||Starting at 5%||3-10 business days|
|Revenue Based Business Loans||$10K – $5m||Starting at 9%||1-3 business days|
Who Qualifies For Equipment Financing?
Approved businesses generally met the following criteria:
How To Apply For Equipment Financing:
Depending on the cost of the equipment, it could take anywhere from three to ten business days for funds to appear in your bank account. Here’s how to start the application process:
Step 1: Make Sure Purchasing is the Right Move
Before you fill out the application, you must first ascertain that purchasing is better for your finances than leasing. What is the likelihood that the equipment becomes outdated in the near future? Will your business need this equipment for several years from now? Is the equipment so vital that it’s worth the interest payments? How many years do you intend to use the equipment? This will help us determine the right terms for the loan.
You should also make sure you know the current market value of the equipment. This will ensure that you request the right amount, as opposed to too much or too little.
Step 2: Gather Your Documents
Applicants must provide the following information and documents:
- Driver’s license
- Voided business check
- Bank statements from the past three months
- Invoice for equipment
Step 3: Complete Application
You can begin the application process by calling us or filling out our one-page online application. Either way, you’ll be asked to enter the information from the previous section along with your desired funding amount.
Step 4: Speak to a Representative
Once you apply, a representative will reach out to you to explain the repayment structure, rates, and terms of your available options. This way, you won’t have to worry about any surprises or hidden fees during repayment.
Step 5: Receive Approval
When your application gets approved, your loan gets set up. Next, the money gets sent directly to the equipment seller. Depending on your arrangements, your first payment will either get pulled from your business bank account or you’ll need to provide checks or electronic payments.
Your Business Loan Gets Set Up – Now What?
Your business loan isn’t just a way to get financing for your business. It’s also an excellent opportunity to start building (or improving) your credit.
Regardless of the type of business loan you get, 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 below the credit limit.
Consistently making your business financing payments on time and in full will have a positive impact on your credit. And that means preferred rates and terms when you next need business financing.
What If I’m Declined For Equipment Financing?
If your application gets declined, we may recommend another product that allows you to purchase the equipment, but possibly for a slightly higher interest rate and shorter term. Possible examples include Business Term Loans or Working Capital Loans.
Your application may have also been declined due to poor credit. In this case, we may recommend a business credit card or a personal loan. Both of these options are much easier to qualify for than business loans. You should also consider credit repair services, which can raise your score by focusing on the issues that are keeping it down.
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 the equipment for at least 36 months, purchasing will likely cost less than leasing. On the other hand, you wouldn’t want to buy a piece of equipment that you’re only going to use for a year or two. For this reason, leasing is often recommended for industries that depend on the latest, most up-to-date equipment.
It’s also important to understand that just like Equipment Financing, leasing 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 business lenders have buy-back programs in which they purchase the equipment from the borrower at the end of the loan term. And since equipment often serves as collateral, a business lender 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.
What Type of Equipment Can I Finance?
At UCS, we finance everything from vehicles to cloud computing technology to manufacturing equipment to medical equipment. If we conclude that we cannot finance your desired equipment, we may recommend another business financing product that would still provide the necessary funds.
Why Do Companies Choose To Finance Equipment?
In most cases, businesses choose to finance equipment because it makes more financial sense than leasing. Using borrowed funds to purchase the 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 their equipment:
- You don’t have the cash. If you’re eager to buy a new piece of equipment or machinery but don’t have the money on hand to make the purchase, equipment financing could help you.
- 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 your business. 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 a matter of days.
- Your equipment needs to get replaced frequently. If your business is already multiplying, you might find that your equipment and machinery get worn down faster than you expected. Use equipment financing to help pay for a new machine.
- 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 Equipment Financing Tax Deductible?
Yes, interest payments for Equipment Financing 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 on this specific piece of equipment.
Do Some Manufacturers Offer Financing?
Many heavy equipment manufacturers offer financing for their products. However, these programs might feature interest 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 the business lender about borrowing enough money to purchase not only the equipment but also cover extra costs.
Can I Get Equipment Financing with Bad Credit?
Yes, this product is available to borrowers with bad credit. 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.