Purchasing a piece of equipment can be a game-changer for a small business owner. This can lead to increased productivity, allow you to add new products or services to your line-up, or significantly improve your current systems and processes.
However, equipment can be expensive, and without the right type of financing, a major purchase like this can put undue strain on your business. If you don’t have the capital on hand to make a large equipment purchase, you may have considered an equipment financing loan – but is this the right choice for your business? Here’s a look at everything you need to know so you can decide for yourself.
What Is Business Equipment Financing?
Business equipment financing is a business loan for the specific purpose of buying a piece of equipment or machinery needed to run a business. The term “equipment” is quite loose. For example, you can use this type of loan to finance heavy equipment or buy a pizza oven, medical equipment, office furniture, or other similar items.
How Does It Work?
When applying for equipment financing, the amount you’ll qualify for depends on the value of the item you’re purchasing. The lender will require you to put up the equipment as collateral and will be able to seize it if you fail to repay your loan.
When choosing your loan, you’ll want to match the repayment period to the amount of time you expect to use your equipment. For example, if you’re buying a machine you plan to use for 10 years, it’s best to get a 10-year loan. A shorter loan period may come with large payments that could strain your business while a longer period would leave you paying for equipment you’re no longer using.
Pros and Cons of Business Equipment Financing
Since they’re collateralized, business equipment loans often have lower interest rates than other types of business loans. The interest you’ll pay is tax-deductible and you’ll also have the ability to depreciate the equipment when you file your taxes. One of the best features of this type of loan is that once you pay it off, you’ll own your equipment outright. This can be a major benefit compared with leasing the equipment you need.
Business equipment loans typically require less paperwork than other types of loans and may be approved faster. Since the equipment is used as collateral, these types of loans are also often available for borrowers with less-than-perfect credit scores.
While these are all significant benefits, there are a few potential drawbacks to consider. First, it’s important to note that some equipment loans require a large down payment – often around 20%. This can be a problem if you’re working on a tight cash margin.
Also, since these loans are attached to a specific piece of equipment, they don’t offer much flexibility. If you find that you need extra cash for other things, you’ll need to seek out additional loan options. Already having an equipment loan in place can impact your debt-to-equity ratio and your credit score, making it harder to get approved for a second loan.
Who Offers Business Equipment Financing?
There are a variety of lenders who offer business equipment loans – including banks, credit unions, and online lenders. The retailer selling your equipment may also offer on-site financing.
It’s best to start exploring your financing options as soon as you begin thinking about making an equipment purchase. This will give you plenty of time to do your research. As you weigh your options, be sure you understand the interest rate, repayment period, any additional fees, and other terms and conditions associated with the loan. This will help you choose the loan type and specific lender that are best suited to your needs.
The Bottom Line
An equipment financing loan can be an excellent solution for many business owners. However, it does have some limitations. Those looking for additional versatility may want to explore a more flexible funding solution, such as a traditional business loan or a merchant cash advance (MCA). Contact us at (714) 500-6622 to learn more about your options. You could qualify for up to $250,000 in just 24 hours.
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