What is Equipment Financing - Resources to Grow Your Business

No matter the device, proper equipment is essential to power the engine of a successful business and to generate growth. As any small business owner can attest, having the most efficient and productive equipment boosts the bottom line. Small business owners can also attest, however, that purchasing or even upgrading existing equipment is costly, and sometimes, equipment breaks at the most inopportune time. Fortunately, traditional and online lenders provide loans exclusively for and equipment. Obtaining these loans can keep a small business operation running smoothly. Equipment financing can have better rates than other types of business loans with less onerous requirements and quicker approval.

What is Equipment Financing?

Equipment financing is specifically used to purchase equipment for your business. Financing works similarly to a home mortgage.  In this arrangement, the equipment acts as collateral for the loan. If the consumer fails to pay back the loan, the lender takes possession of the property, but the consumer can use the property if he/she makes regular payments. Like a home mortgage, most equipment loan lenders will require a down payment, as much as 20%. 

Equipment Financing vs. Equipment Leasing

Some, understandably, confuse equipment financing with equipment leasing and may think the two are interchangeable. The two are different financing options though. In an equipment lease, a renter (lessee) takes possession of the equipment from the owner (lessor) for a period of time for an agreed-upon price. At the conclusion of the lease, the equipment returns to the owner. In equipment financing, a consumer obtains a loan to purchase equipment and takes ownership, while the lender places a lien on the property until the debt is repaid.

Equipment financing terms range from months to years. Qualified recipients can obtain loan amounts from $10,000 to more than a million. Some lenders have rates as low as 3% and increase from there. Traditional outlets like major banks will have better interest rates and terms, but loans at traditional institutions are typically available for established businesses and those with good credit scores. 

Can you qualify for an Equipment Loan as a Startup?

Finding available good terms for financing can be difficult, if not impossible for startups. Like all loans, consumers will have more options at better rates if they have good credit. Consumers can check their credit scores at annualcreditreport.com. 

Lenders require financial documents, business licenses, and tax filings. Traditional lending institutions provide better terms but take longer to approve. Traditional lenders are not a viable option for startups though. One reason is that traditional lenders usually require about a year of business operations. Online lenders can be a good source for startups looking for equipment financing. Rates and terms are not typically as good with online lenders as with traditional financing sources, and their process is faster. Before deciding on an equipment loan, a startup or any other small business should explore other financing options. 

Know Your Options

• Business Line of Credit: This financing option provides access to flexible funding up to a maximum limit. Unlike a traditional loan, this option allows a consumer to borrow what is needed, instead of the full amount. Some business lines of credit return or revolve to the maximum limit, usually monthly, once the borrower repays debt. Flexibility is the main advantage of this option. The downside is that these loans carry higher interest rates than traditional loans. Borrowers will find better rates at banks, but banks won’t lend to anyone with bad credit. Online lenders provide business lines of credit for those with bad credit though. 
• Small Business Loans: Small business loans are another option. These loans have the best rates available, but like all other standard loans, are not available to those with poor credit. The Small Business Administration is a major lender. The SBA provides billions in loans in a typical year, and the CARES Act provided $376 billion in added funding to assist businesses during the Coronavirus pandemic. Private lenders issue these loans, but the SBA with the full faith and credit of the U.S. oversees them and bears some of the risk. The SBA offers several types of loans, including equipment loans, up to $5.5 million. While SBA loans have great rates and terms, SBA loan applications are lengthy, require extensive supporting documentation, and approval can take months.    

Three Reasons why Equipment Financing is a Good Resource for Small Businesses

1. Equipment is vital but expensive: When a small business contractor’s crane breaks down or when a small financial firm’s computer crashes, they can’t afford to use inferior or broken equipment and stay in business. When equipment breaks, businesses need to replace it immediately but likely won’t have enough cash on hand to buy a replacement. Equipment loans allow businesses to address broken or outdated equipment and maintain their capital for other expenses.
2. Secure loan: The equipment purchased by the loan is used as collateral. Unlike unsecured business loans, secured loans come with better rates and terms since they are less risky to lenders. Once the borrower pays off the loan, the small business has an additional asset. 
3. Faster approval: Unlike traditional business loans that can take months for approval, equipment financing takes only days. 

Individual circumstances vary. ROK Financial advisors are available to discuss individual small business financing options.