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It’s a challenging time to own a small business. From managing business expenses to making sure you and your staff are safe and healthy, you probably have a lot on your mind. Thankfully, there is assistance available through the Small Business Administration's (SBA) coronavirus relief options, which include SBA Express Bridge Loans and SBA Debt Relief. If your business is struggling, it may be worth considering one of these options.For many small business owners, having the right equipment is crucial to the success of their operation. For a restaurant, that may be commercial kitchen appliances; for a small farm, it may be agricultural equipment; for an accounting firm, that may be printers and desktop computers.Because of how pricey it can be, many small business owners lack the funds to purchase essential equipment and machinery. That’s where equipment financing (also called equipment loans) comes in. If you’re new to equipment financing, we’re here to help you understand what it is, where to get it, and offer some tips on the application process to help you be better prepared to build a thriving business.
How Equipment Financing WorksThere are many financing options for business owners, including loans designed for the specific purchase of business-related equipment. If you’re wondering what equipment financing is, you’re not alone. Here are the basics of equipment financing:
An equipment loan is a type of small business loan for the specific purchase of necessary business equipment. They are business loans that are generally paid off within a few years. With business equipment financing, you can secure loans without tapping into valuable cash reserves or relying on higher interest forms of financing because the equipment acts as a form of collateral, similar to a car loan. 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 the 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 they are 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.
- 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 a few months to 10 years
- Options include a loan or lease
Benefits of Equipment LoansIn 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 to Equipment FinancingAs with most things, there are some potential downsides to consider when it comes to equipment financing. Here are a few downsides that may be worth considering as you think about equipment financing:
- Any additional liabilities required by the lender. 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.
- The term length in comparison to the typical equipment lifespan. 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.
What’s the Difference Between Equipment Financing and Leasing?The main difference between equipment financing 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 borrowers 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 to lease the equipment. 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.
Equipment Finance LendersCurious about who offers equipment financing? This sampling of lenders came from the Google search query “Best equipment finance lenders”:All information was accurate as of 1/7/21.
What Costs are 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 AmountsA 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:
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.Typically, a high credit score, large down payment, and collateral will warrant better interest rates and loan terms. The range for interest rates and terms are generally:Interest rates: Typically 2 to 20%Loan terms: Up to 10 years, but may vary based on factors including the borrower’s credit history and the type of equipment being financed
- Personal and business credit
- Your business plan
- Business history
- Annual business revenue
- Your personal resumé
Consider the ROI of the EquipmentBefore 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:
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.
- 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 FinancingIf 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 EquipmentGenerally, 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:
- Irrigation systems
- Production line machinery
- Cement mixers
- Threshing Machine
Equipment for Dental or Medical PracticesMedical 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
- First aid/AED machines
- Surgical lighting
- Water filtration system
- Sanitation equipment
Commercial Equipment for RestaurantsCommercial 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:
- Deep fryer
- Pots and pans
- Storage containers
- Industrial mixers
- Serving ware
- Cleaning supplies
- Rubber floor mats
Office EquipmentWhen 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:
- Office furniture: desks, chairs
- Solar panels
- Internet/WiFi equipment
- Phone system
Gym EquipmentBusinesses 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:
- Free weights
- Reformer machines
- Yoga mats, blocks, straps, and bolsters
- Exercise bikes
- Stability balls/medicine balls
- Floor mats
- Safety equipment
Applying for Equipment FinancingIf 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 positionRunning 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:
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.
- 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 forQualifications 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.
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.
- Monthly/annual revenue: Some lenders may want to see that you have consistent revenue and check that you meet their minimum income requirements.
3. Researching and choosing a lenderAn 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:
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.
- 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 documentsAfter 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:
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.
- 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 LoansIf you need short- or long-term business loans, bad credit business loans, or other types of financing options, here is a list of other small business lending options that may be worth considering, depending on your business specific needs:
- 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.
- Personal loans: Personal loans are offered by numerous lenders and granted based on your personal credit history (not business credit). Note that some personal loan lenders do not allow borrowers to use the funds for business expenses.
- 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.
Finding Equipment Financing Options from Lantern CreditThere 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 Credit makes it simple to compare small business loans by filling out one simple application. We’re here to save you time so you can focus on getting the equipment you need to help your business succeed.
This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC20044
About the Author
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