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What is Equipment Financing?
Equipment financing is viable for businesses that need to purchase or lease new or used equipment, such as commercial vehicles, office furniture and fixtures, heavy equipment, and other equipment and machinery specific to your industry. Instead of making a one-time purchase upfront, equipment financing companies help you to spread out the payments and maintain positive cash flow.
Medical, construction, agriculture, transportation, restaurants, hotels, and other equipment-reliant industries benefit the most from equipment financing. Qualifying for equipment financing is easier compared to other loan options because the equipment you’re going to purchase serves as collateral for the loan.
$25,000 – $5,000,000
Starting at 5.99%
24 - 48 Hours
How Equipment Financing Works
Once approved, you’ll receive the money to purchase or lease the equipment, which will be the collateral for the loan. This means you don’t have to put other personal or business assets on the line.
If you default on the loan, the lender will repossess the equipment to pay for the outstanding balance. As long as you repay the loan on time, you can continue using the equipment until the repayment term or lease is over.
What are the best industries for Equipment Business Loans?
Transportation equipment financing also allows you to preserve capital and expand cash flow. By saving money on large purchases required for transportation, your company can use working capital on other business expenses.
Equipment financing offers medical practices flexibility to make the necessary purchases to maintain high treatment standards for their patients while maintaining capital by spreading payment terms. Your practice can use the equipment while earning back the funds to make payments over the financing terms.
By using equipment finance, construction companies can extend the cost of equipment finance interest rates into longer payment terms and avoid costly up-front expenses. It allows the construction company to preserve working capital and obtain the tools necessary to get the job done.
By using equipment financing, many farmers have worked with lenders to fund the use of necessary equipment to maintain operations. If you are a farmer with equipment needs, consider exploring equipment financing options from different lenders to find a plan that works for your farming business.
Restaurants and Hotels
The Hospitality industry requires constant upgrades and repairs. In the restaurant industry, you need to purchase commercial ovens, refrigerators, stoves, and other equipment to keep up with the competition and stay on top of current trends. These are expensive purchases, and it can be difficult for a business owner to sustain cash flow without proper financing plans. By using equipment financing, hotel owners can reduce the burden of large purchases and extend the payment out through the length of the financing terms.
Ready to apply for Equipment Financing?
What is the Difference Between Equipment Financing and Equipment Leasing?
An equipment financing or an equipment loan is a lump sum of money that a business owner borrows from a lender.
Like any traditional term loan, the lender and borrower will set up the terms reflected in the equipment financing agreement. Lenders and borrowers will negotiate the best equipment loan rates and length of its terms to purchase the equipment you need, and the loan is paid back like any other loan (i.e., a weekly or monthly payment). Spreading out the payments over the length of the term eases the burden of large purchases. At the end of the period, the borrower will own the equipment.
Equipment leasing works similarly to a mortgage or a traditional car lease.
Essentially, your small business is renting the equipment from a lending company while making monthly payments over the lease terms. You and the lender negotiate terms and set up monthly payments for the equipment that your business needs and determine a set length of time.
Once the lease term ends, there are generally three options: terminate the terms of the lease and return the equipment, extend the terms and keep making monthly payments, or buy the equipment outright from the lender at a fair market value.
Pros and Cons of Equipment Financing
Purchase, Lease, or Repair Business Equipment
The main benefit of small business equipment financing is that you’ll have the resources you need to purchase, lease, or repair your equipment on your business. You don’t have to wait for months to repair faulty equipment or make the necessary upgrade. You can improve your bottom line and cater to more customers with the right equipment.
No Need to Submit personal assets or Additional Collateral
One difference between equipment loans and traditional loans is that the equipment itself is used as collateral to secure financing. It is one benefit that small business equipment financing provides proprietors, as the emphasis for the lender is more on the value of the equipment over time than the borrower’s credit history. This also means some lenders may not require a down payment from the business. Even if a down payment is necessary, the amount isn’t usually as significant as other options.
This feature makes the qualification easier for small businesses and allows SMEs to obtain the expensive equipment needed to get the job done.
Spread Equipment Payments
Maintaining positive business cash flow is a constant concern for small business owners. Purchasing equipment upfront can only complicate your cash flow. Taking out an equipment loan or lease allows you to spread the cost of the equipment, so you’ll be able to allocate a fixed amount every month and budget your expenses.
With an equipment loan, because you make payments throughout the terms of the loan, you pay interest to the lender at the equipment financing rates agreed on in the loan terms. For most equipment loan terms, the equipment finance interest rates paid on the payments can be written off as tax-deductible. However, the total principal payment cannot be written off.
For most equipment leasing program terms, business owners can write off the entire lease payment as a business expense. That means the whole amount paid for the equipment can be written off by deducting the monthly lease payments. Another significant tax benefit to leasing is the government incentives written into the tax code. According to Section 179 of the IRS Tax Code, the full amount of equipment purchases can be written off if an equipment lease is set up. Even if you do not pay the entire amount for the equipment financing rates in the year you are filing taxes, you can deduct the entire amount from your taxes for that year.
We recommend forming a strong relationship with your tax professional and doing research when choosing the right lender for your financing needs. By working closely with lenders and tax professionals, you can take advantage of the tax benefits that equipment finance companies can offer.
Equipment Might Become Obsolete
If you opt for leasing, the equipment might become obsolete by the time you fully repay the loan. Additionally, you won’t own the equipment until you’ve repaid the loan. This is something to consider, especially if you’re planning to purchase the equipment.
Restricted Use of Funds
Equipment financing can only be used to finance equipment purchases or leases. If you need to fund other expenses, like day-to-day costs, utilities, or payroll, you’re better off exploring other options.
Down Payment May Be Required
In some cases, you may need to pay 10% to 25% of the total equipment cost. You may not be able to qualify if you don’t have cash for the down payment. However, some lenders are willing to fund 100% of the equipment value.
What are the Requirements for Equipment Financing
Remember that the requirements may vary depending on the lender you’re working with.
If you apply through SMB Compass, here are the requirements you need to prepare:
- 1 page online loan application
- 3 months’ worth of bank statements
- Invoice of equipment
- At least 2 years in business
How to Apply for Equipment Financing
- Fill out our online application form. It’s free, and it won’t affect your credit score.
- After reviewing your application, we’ll reach out to you to discuss your equipment financing options.
- Receive loan offers from our partners and fund your business.
How Long is the Underwriting Process for Equipment Financing?
Applying for small business equipment loans is faster when the equipment costs under $200,000. If this is the case, the application and closing process can be completed within 24 to 48 hours.
“Small-ticket” commercial equipment loan decisions are heavily driven by the equipment type and the credit quality of the business owners. With strong personal credit, an established business history, and financing high residual equipment, you can expect the application process to take just 24-48 hours.
Lenders may ask for more financial information if the equipment costs more than $200,000. The process can take anywhere from 7 to 14 days since a more thorough underwriting process is needed to obtain the best equipment loan amount and rates for approval.
Equipment loans are usually readily available through an online lender, bank, or credit union. Every lender will have varying requirements for their equipment loans, so be sure to browse the potential options available for your business.
Equipment Financing Alternatives
If you need money to fund other expenses aside from equipment, here are some alternatives you should check out:
Business Line of Credit
A business line of credit is an excellent option for businesses looking for flexibility in financing. Once approved, you’ll receive a credit limit from the lender, and you can withdraw from it anytime without exceeding the limit. You only have to repay the money you’ve withdrawn (plus interest) – not the entire credit limit.
Check out invoice financing if your business is experiencing cash flow issues due to unpaid invoices. This financing allows you to use pending invoices as collateral in exchange for immediate funding.
Lenders generally advance 80% to 90% of the total invoice value, and you’ll receive the remaining percentage (minus lender fees) once your customer pays their dues.
Business Term Loans
A business term loan is your traditional business loan where you receive a lump sum of money you need to repay in fixed installments over a specified period. Many business owners prefer term loans because they’re straightforward, and you can use the funds for almost any business purpose.
Ready to apply for Equipment Financing?
The determining factors in qualifying for equipment financing are based on the business credit history and time in business. Additionally, you can be prequalified for equipment loans by providing bank statements and a credit report before purchasing any equipment or machinery. Since it’s self-securing, lenders would be more than willing to extend a loan amount equivalent to the total value of the equipment.
Every lender will have varying requirements for their equipment loan products. If you’re applying from a credit union, bank, or online lenders, the best way to know their requirements is to ask them directly.
The equipment or machinery being purchased is required to be used as collateral for equipment financing. After the equipment is paid off during the terms of the financing plan, the business owns the equipment outright.
No. Since equipment financing is self-securing, lenders would be more than willing to extend a loan amount equivalent to the total value of the equipment. This makes it easier to qualify for equipment loans compared to other unsecured loans.