What You Should Know About Equipment Financing

Matthew Gillman

Updated: October 5, 2018
What is the different between an equipment loan and equipment financing?

Purchasing new equipment and maintaining the quality of existing equipment is business as usual for small business owners. They need to upgrade, replace, and purchase equipment to maintain quality of work and take on new projects. In this article, we are going to tell you five things you need to know when considering equipment financing. By keeping these things in mind, you will be able to keep your operations running smoothly.

How Equipment Financing Works

A solid equipment financing and purchasing plan is essential in maintaining smooth operation. Aside from that, it contributes to the growth of your small business to meet the increasing demands of your clients. Many small business owners have found success by borrowing money through equipment financing programs. This allowed them to make the purchasing of new machinery, vehicles, etc. possible, without straining their cash reserves.

The application process is simple with limited documents required. When you are approved for an equipment financing loan, you can amortize the debt over a three to five year period. With the low monthly payments stretched over a few years, business owners are able to constantly and automatically upgrade and buy new equipment. At the end of the loan term and after the loan amount is paid in full, you then own the equipment outright.

Related: How Equipment Financing Helps Small Business Owners

What Equipment Financing Can Be Used For 

Equipment loans can be used for different equipment purchases that are essential to the day to day operations of businesses. Many small business owners have found that equipment loans have enabled them to adapt quickly to changes in the market. Aside from that, it keeps them one step ahead of their competitors. A new piece of equipment that works more efficiently with higher output than older equipment can improve efficiency. It can also reduce on-going repair expenses, increase productivity, cost less to run, and ultimately, increase profit margins for businesses. The benefits that come with a new piece of equipment can pay for itself!

Considering Equipment Leasing

Another alternative to equipment loans is equipment leasing. Equipment leasing is different from an equipment loan. At the end of the lease term, the small business usually returns the equipment to the leaser. Equipment leasing lends the small business owner an extreme amount of flexibility. Most of the time, the business can buy out the equipment at the end of the lease term. Restrictions on equipment leasing are often less constraining on the small business owner than traditional equipment financing. 

How to Qualify for Equipment Loans

Different lenders and lessors require different credit qualifications to apply for an equipment loan. Just like any credit decision, the lender will do an extensive credit history check. This means that as a small business owner, your personal credit will come into play. Make sure you understand your credit history before applying for equipment financing so that you are not caught off-guard. The higher your credit score, the more flexible your loan terms will be and the higher your chances of loan approval will be. You can monitor your personal credit, free, at Credit Sesame, a leading credit monitoring service.

Some lenders also require a business plan to lay out a vision for future growth. With any credit risk, financial institutions want to make sure the borrower will be able to repay the money owed. If an entrepreneur can show the lender they have a history of business success, they won’t have a problem qualifying.

Several factors come into play when determining the rate options for equipment financing:

    • The requested loan amount
    • Your personal and small business credit score
    • Length of time you have been in business
    • Your business’ annual revenue
    • Demonstration of success in the market

All these will all influence your business’ qualification for equipment financing. 

Benefits of Equipment Financing

Equipment financing is perfect for small business owners who have demonstrated success in the market and are trying to grow. Many small businesses have been able to use equipment financing to maintain and expand their business operations on the fly. Part of this reason is because of its quick approval process.

Another benefit of equipment financing is that monthly payments on an equipment loan can be considered an operating expense. Take note that these are tax deductible. Make sure to discuss this with your lender and tax professional when going over the terms of the loan. But many small business owners have enjoyed the savings by deducting loan payments in the past.

Running a small business is hard. Knowing where you’ll be in 6 months or a year is not always clear. Many lenders offer flexible payment schedules for their equipment financing plans, which is great for small business owners. By setting up a flexible plan with your lender, you can make quick decisions on the go that positions your small business for success.

Equipment financing is one strategy for maintaining and expanding your small business no matter how your cash supply is doing. If you need to repair or upgrade your operations, consider an equipment loan to keep your small business ahead of the game.

Related: 4 Reasons Why Equipment Financing is the Best Loan Option for You

 

Matthew Gillman
Matthew Gillman is the founder and CEO of SMB Compass, a bespoke business financing company focused on providing financing and education to small businesses across the U.S. The company has provided over $250 million to more than 1,250 businesses. Coming from a family of small business owners sparked Matthew’s passion to not only become an entrepreneur, but also to work with his fellow entrepreneurs to build long-lasting relationships.

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