Equipment Financing for Small Businesses

Q: What are typical terms for equipment financing?

The loan is usually short term, which means it will have to be paid off anywhere from 6 months to 3 years. However, some equipment loans will not need to be repaid for 5 or even 10 years. The terms vary depending on the loan structure, such as if it’s a Small Business Administration (SBA) loan.

Q: Can a new business apply for equipment financing?

Yes, while lenders typically like to see at least one year in business, preferably two, and at least $100,000 in annual revenue, you can still qualify for financing as a startup or a new business. This may require detailed documentation, such as your business plan and foreseeable revenue, to give lenders more confidence that you will be able to repay the loan.

Q: What credit score is required for small business equipment financing?

Underwriting requirements and credit score requirements vary by lender. Business credit scores range from 0 to 100 and the higher the credit score, the better your financial position. As for your personal credit, which could also be relevant, a “good” personal credit score starts at 670 with most agencies, and a “good” or “excellent” score typically makes a stronger case for approval. Credit is just one of the criteria a lender evaluates.

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What Is Equipment Financing?

Equipment financing describes a loan used to purchase business-related equipment. An equipment loan is a type of small business loan for the specific purchase of necessary business equipment. These are business loans that are generally paid off within a few years. With business equipment financing, your goal could be to secure loans to purchase big-ticket items crucial to your success without tapping into your cash reserves or relying on high-interest forms of financing. The equipment acts as a form of collateral, similar to a car loan. This doesn’t always have to apply to heavy equipment financing, either. For a restaurant, an equipment loan could mean commercial kitchen appliances. And for an accounting firm, it could fund printers and desktop computers.

How Small Business Equipment Financing Works

Here are the basics of equipment financing:

Funds can be used to buy new or used equipment
Equipment usually acts as collateral for the loan
Depending on the lender, financing may be available for up to 100% of equipment cost
Terms vary from lender to lender, but may fall anywhere from 6 months to 10 years
Options include a loan or lease

Some lenders may ask for a personal guarantee in addition to placing a lien on the equipment. A personal guarantee gives the lender permission to seize a business owner’s personal assets in the event that you default on paying back the loan. This reduces the financial risk to lenders and is a common practice for business loans. Equipment loan rates and terms are set by the lender. With equipment financing, you will likely repay the amount owed for the equipment in installments over a predetermined amount of time. One example of a candidate for equipment financing is a new restaurant: The owner may need to buy various types of equipment, especially if the restaurant is just starting out. Let’s say they need $100,000 to pay for kitchen equipment, like commercial ovens, stoves, and refrigerators. But $100,000 is a lot of money to take from savings, if you even have it available. With an equipment loan, the restaurant owner could get the equipment they need without putting too much strain on their personal or business finances. They may be able to get funding for a large portion of the cost of equipment, possibly even 100%. Let’s say that instead of having to pay $100,000 out-of-pocket, the owner is approved for a business equipment loan of $80,000. The ovens, stoves, and refrigerators act as collateral on the loan, meaning if the restaurant owner defaults on payments, the lender can claim those assets to recoup their losses. Since the restaurant owner only had to pay $20,000 out-of-pocket, they have more money in their cash reserves that can be used to fund other essential business startup costs, like permits, payroll, and marketing.

Pros and Cons of Equipment Financing

Benefits of equipment loans

In addition to providing funds for purchasing necessary equipment, there are other potential benefits of equipment financing, including:

Possible tax deductions on the equipment purchased
Application may require less paperwork and have a faster turnaround time than traditional business loans
Allow you to maintain cash flow without drawing from a business line of credit or credit card
Equipment loan rates may be more favorable than traditional loans
May be easier to qualify for than a traditional business loan since the equipment itself acts as collateral

Downsides of equipment loans

Here are a few downsides that may be worth considering as you think about equipment financing:

Additional liability. Depending on factors like the borrower’s credit history, lenders may have additional requirements for lending. In some cases lenders may require a personal guarantee, which means that the borrower is personally responsible for the loan should the business be unable to make payments.
Down payment. Some lenders may require a sizable down payment.
Term length. In some cases, borrowers may be making payments even after they are no longer using the equipment. Carefully weigh the term length in comparison with how long you anticipate using the equipment in question.

Equipment Financing vs. Leasing

The main difference between equipment buying and equipment leasing is who owns the equipment. With equipment financing, the business owner owns the equipment at the end of the loan term. With equipment leasing, the lender owns the equipment and rents it out to the lease holder. Since you do not own the equipment, it does not act as collateral, which can make this type of financing more risky for lenders. If your business runs on equipment that requires consistent repairing or replacement, you may want to consider an equipment lease. With an equipment lease, you rent the equipment from a lender (e.g. bank, equipment distributor, leasing company) for a set period of time. At the end of the lease, you can choose to renew or buy the equipment, or just walk away. Equipment leasing can also be useful for business owners who don’t have collateral to offer, don’t want a personal guarantee, and/or don’t have a down payment to help secure the loan. Depending on the borrower's credit history, it may be easier to qualify for an equipment lease than it is to qualify for a business equipment loan. When choosing between lease or loan, consider the length of time you anticipate needing the equipment to function. If it’s for a longer term, you may find it more expensive to lease than to purchase the equipment, especially if you can continue to use the equipment for years to come.

Costs Associated With Equipment Financing

When you’re comparing loans, especially equipment loans for a startup business, it’s important to consider the overall cost of the loan and payments.Lenders will generally have their own criteria for equipment financing, including their own terms and eligibility requirements. Let’s break down how different costs are determined for an equipment loan.

Equipment loan rates, terms, and loan amounts

A number of factors go into calculating equipment loan rates, term, and loan amounts. Generally, lenders determine loan approval and conditions by assessing the potential risk of lending to an applicant. A few general factors lenders may consider include:

Personal and business credit
Your business plan
Business history
Annual business revenue
Your personal resumé

Generally, banks require that businesses be established for two years to qualify for equipment financing and have significant annual revenue. Alternative lenders like those that offer online business loans, may have different qualifications and offer financing to borrowers with younger businesses or less credit history. A strong credit score, large down payment, and collateral will typically warrant better interest rates and loan terms. The range for interest rates and terms are:

Interest rates

As with any loan product, rates and approval vary based on your financial situation and credit profile. With a financing marketplace such as Lantern, you can much more easily learn what rates and providers are available for you specifically without having to complete applications with multiple individual providers.

Loan terms

Many of these loans must be repaid in time spans ranging from 2 to 5 years, but some loans may reach 10 years. The terms vary based on factors including the borrower’s credit history and the type of equipment being financed

Consider the ROI of the equipment

Before you sign for a business equipment loan, consider the return-on-investment (ROI) and how equipment will contribute to your business in the short- and long-term. Here are some questions that could help you determine how the equipment will add value to your business:

What are the short-term and long-term gains and goals for your business?
How much will the equipment contribute to the overall success and revenue?
Does the monthly payment exceed the financial benefit of equipment?
Are you saving on labor costs by purchasing a more efficient piece of equipment or office software?
How long will the equipment last? Is it longer than the loan term?
Will the equipment be obsolete within a few years?

Similar to other types of personal and business loans, some lenders may also charge origination fees, application fees, or early repayment fees, which can affect your ROI calculations. Consider asking questions and doing a thorough comparison of lenders to see which one offers the right equipment financing for your business.

Common Types of Equipment Financing

If you’re ready to finance equipment, try to identify the specific industry your business is in. There are lenders who specialize in serving certain industries, and they may be able to help you secure the right equipment loan for your situation.The following sections focus on industries and items that could be considered for equipment financing.

Industrial equipment

Generally, industrial equipment includes large pieces of machinery that require a significant investment. The agricultural, construction, and manufacturing industries may be able to use equipment loans for the following:

Trailers
Cranes
Excavators
Irrigation systems
Production line machinery

Equipment for dental or medical practices

Medical devices and equipment are necessities for doctors and their staff. Having clean, updated, high-quality equipment is an important part of managing a successful practice that keeps its patrons safe. Examples of possible candidates for equipment financing in the healthcare industry are:

Diagnostic equipment
Specialized chairs/tables: dental, chiropractic, examination table
Walkers/wheelchairs
Computers/software
Surgical lighting

Commercial equipment for restaurants

Commercial equipment financing is incredibly important for restaurants who rely on large-scale kitchen equipment to serve their customers. Additionally, it’s important for restaurant owners to use equipment that meets local and state regulations for food service. If you’re a restaurant owner, you may be able to use equipment financing to buy things like:

Oven
Coolers/refrigerators
Freezers
Cabinets
Industrial mixers

Office equipment

When you think of equipment loans, office equipment may not be the first thing you think of, but financing is just as important for businesses that operate in an office as those who need large machinery. You may be able to use a business equipment loan for the following office necessities:

Computers/keyboards
Office furniture: desks, chairs
HVAC
Solar panels
Printers/scanners

Gym equipment

Businesses in the fitness industry may also consider equipment financing. Traditional gyms and privately owned studios (yoga, Pilates, dance, etc.) require certain types of equipment that may be obtained with a loan, including:

Treadmills
Free weights
Exercise bikes
Fans
Safety equipment

Qualifying for Equipment Financing

To be in the best position to get equipment financing, concentrate on these areas.

Time in business

How long has your business been in existence?

Revenue

How much money has your business earned? Have detailed monthly and annual records handy.

Credit score

Find out your credit score. It’s essential to know this when you go through the evaluation process. It’s possible to get equipment financing with bad credit, but it is not easy.

4 Steps to Apply for Equipment Financing

If you’re ready to apply for an equipment loan, you’ll want to be prepared with the proper documentation and an understanding of your business’s needs. Here are four steps that are generally included in the application process for equipment financing.

1. Assessing your business needs and financial position

Running a business comes with many questions, and how and when to seek out a loan is one of them. Before you do so, it will help to come with a detailed business plan in addition to asking a few simple questions to clarify your equipment loan needs:

What equipment do you need and is it essential to business operations?
How much monthly revenue do you have, or do you anticipate?
How much cash flow do you have to pay loan installments?
Will this equipment help increase revenue? By how much?
Do you have cash reserves and if so, how much?
Do you want to purchase new or used equipment?

By answering these questions, you should have a clear idea of what you can afford and what’s absolutely essential to help your business grow and thrive. You can then start zeroing in on the loan types and lenders that fit your business’ needs. Recommended: Mistake Proof Your Business Idea

2. Learning what you qualify for

Qualifications for equipment loans will vary depending on the lender you choose, but here are general eligibility requirements to be mindful of:

Creditworthiness: This includes your personal and business credit scores, if your business is well-established. A general rule of thumb to keep in mind is that higher credit scores help borrowers secure more competitive loan terms and interest rates.
Business history: The longer you’ve been in business and can show consistent monthly and annual revenue, the more attractive you typically are to lenders. For example, some banks may require businesses to be established for two years to qualify for an equipment loan.
Monthly/annual revenue: Some lenders may want to see that you have consistent revenue and check that you meet their minimum income requirements.

Aside from these basic factors, lenders may require additional information to approve you for a business loan. It’s generally wise to compare lenders thoroughly before applying.

3. Comparing lenders

An important step in knowing how to apply for a business loan is identifying the type of lender that’s right for your qualifications and needs. When it comes to equipment financing, lenders generally fall into one of the following categories:

Banks: Typically prefer borrowers with strong credit scores and an established business history, but can offer competitive interest rates, loan amounts, and terms.
Credit unions: Member-funded and community-based organizations that may offer lower interest rates, even compared to traditional banks. Usually have similar eligibility requirements as banks.
Online lenders: Compared to traditional lenders, online lenders can provide faster application and funding turnaround times. Eligibility requirements may be less strict than other lenders, but interest rates can also be higher.

Keep in mind, when you apply for a loan, lenders generally do what’s known as a hard credit pull (or inquiry) to assess your creditworthiness. This can have an impact on your credit score. That said, lenders often allow borrowers to see if they pre-qualify for a loan. This process often involves the lender doing a soft credit pull (as opposed to a hard credit pull). This will not impact a potential borrower’s credit score.

4. Gathering documents

After you’ve chosen a lender and you’re ready to apply for a business equipment loan, preparing documentation to show your business is prepared to take on the loan payments is the next step. Here are a few of the documents that are generally required for loan applications:

Business and personal bank statements
Business and personal tax returns
Business legal documents, if applicable (lease or franchise agreement, articles of incorporation, licenses, permits)
Personal identification
Personal resumé
Business plan
Revenue statements

With these documents at the ready, you’ll hopefully be better prepared for the application process. Keep in mind that the application and approval process may vary depending on the lender and could take as little as a couple of business days, or up to a few weeks.

Alternatives to Business Equipment Loans

Here is a list of other small business lending options that may be worth considering, depending on your business specific needs:

Restaurant loans: Short- or long-term financing designed to meet the needs of new or expanding restaurants.
Invoice factoring: Invoice factoring uses unpaid invoices as collateral on a cash advance from your lender.
Inventory financing: Used to pay for products that will be sold at some time in the future. The inventory acts as collateral for the loan.
SBA loans: Backed by the U.S. Small Business Administration and offered by banks and other approved lenders.
Commercial real estate loans: For the purchase or renovation of a business property, such as office space, an industrial building, or storefront.
Business line of credit: Short-term financing that can be revolving or non-revolving in which you pay interest on unpaid balances.
Online loans: Online lenders offer similar loan options as a traditional bank, but typically have a faster approval process and may offer more options for potential borrowers who may be unable to qualify for a traditional bank business loan.
Merchant cash advance: Allows small businesses (“merchants”) to get a cash advance for business expenses in return for a portion of their future sales or receivables.
No money down small business loans: They exist, but may come with high interest.

Finding an Equipment Financing Option With Lantern

There are numerous options to choose from when you’re looking to invest in new equipment to help your business grow. Finding the right options can be a game changer, which is why Lantern makes it simple to find a recommended small business loan in minutes.

Additional resources

Leasing vs Purchasing Equipment for Businesses

Leasing equipment can keep the initial cost down and be tempting, but there are major drawbacks to leasing equipment for a business, too. Learn more.

Heavy Equipment Financing: What to Know Before Applying

If you're looking to purchase heavy duty equipment for your business, you may want to consider heavy equipment financing vs leasing. Learn more.

8 Tips To Get Equipment Financing With Bad Credit

Good news! There might still be hope to finance your business equipment if you have bad credit. Find out here!

FAQ

What are typical terms for equipment financing?

Can a new business apply for equipment financing?

What credit score is required for small business equipment financing?