Equipment Financing for Small Businesses
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What Is Equipment Financing?
How Small Business Equipment Financing Works
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
Pros and Cons of Equipment Financing
Benefits of equipment loans
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
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
Costs Associated With Equipment Financing
Equipment loan rates, terms, and loan amounts
Personal and business credit Your business plan Business history Annual business revenue Your personal resumé
Consider the ROI of the equipment
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?
Common Types of Equipment Financing
Trailers Cranes Excavators Irrigation systems Production line machinery
Equipment for dental or medical practices
Diagnostic equipment Specialized chairs/tables: dental, chiropractic, examination table Walkers/wheelchairs Computers/software Surgical lighting
Commercial equipment for restaurants
Oven Coolers/refrigerators Freezers Cabinets Industrial mixers
Computers/keyboards Office furniture: desks, chairs HVAC Solar panels Printers/scanners
Treadmills Free weights Exercise bikes Fans Safety equipment
Qualifying for Equipment Financing
Time in business
4 Steps to Apply for Equipment Financing
1. Assessing your business needs and financial position
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?
2. Learning what you qualify for
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.
3. Comparing lenders
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.
4. Gathering documents
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
Alternatives to Business Equipment Loans
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.