Getting a Loan for Business Equipment: Options, Pros, and Cons
If you want to expand your business, chances are you need some equipment to do so. But buying new tools can be expensive, and putting up a lot of cash upfront can be a challenge for small business owners.
Thankfully, it’s possible to get a loan for business equipment. With equipment financing or equipment loans, you can finance the tools you need to scale up your business operations.
Looking to expand your small business? Keep reading to find out all of your business financing options when it comes to making equipment purchases.
How Equipment Financing Works
Equipment financing doesn’t just refer to purchasing large items like construction equipment. These types of loans can be used to purchase any piece of equipment needed, whether that’s office equipment, delivery vehicles, or a new oven for a restaurant.
An equipment loan is a type of business collateral loan. In other words, the equipment is the asset that is put up as collateral for a secured business loan. With these types of business loans, the borrower uses the loan money to purchase the equipment, pays the loan off over time, and then owns the equipment outright once the loan is paid back in full.
How to Get a Loan for Business Equipment
Equipment financing is usually easier to qualify for than other types of business loans. That’s because the loan amount is based on the type of equipment you plan to buy rather than just your business’s cash flow and credit score. It's also a secured loan, which is often easier to get approved for than an unsecured loan.
The loan amount, loan terms, and interest rates vary by lender. In some cases, you may be able to get financing even if your business has bad credit. Often, you won’t be asked to put up additional collateral since the equipment serves as the security asset. But in some cases, you may be asked for a personal guarantee.
To get a loan for business equipment, you’ll need to apply with a lender who offers equipment financing. You’ll need to submit a loan application that includes the details of your business, the equipment you plan to purchase, and any other eligibility requirements requested.
Where to Get a Business Equipment Loan
There are many options available when it comes to getting a loan for business equipment. Each one will have its own eligibility requirements and loan terms, so it’s best to do some research to find a lender that fits your business needs.
Online Lenders
Online lenders — like Backd — are a great way to get alternative financing for your business and equipment financing needs. They often are able to streamline the application process, making it faster to get approved. In many cases, online lenders have lenient credit requirements and offer higher loan amounts than other types of financing.
Banks and Credit Unions
You can also get an equipment loan from a traditional bank or credit union. While they may have favorable rates and terms, they also often have strict eligibility requirements and credit approval. You’ll usually need to have good personal credit as well as be in business for a few years and have excellent business finances.
SBA Lenders
Another way to get an equipment loan is through the U.S. Small Business Administration. With an SBA loan, business owners can get long terms and competitive interest rates. These types of loans, such as 504 loans, can be used for all types of financing, including to buy equipment. However, you often need a decent credit score and reliable annual revenue.
5 Pros of Equipment Financing
Less documentation: Because equipment loans are secured by the equipment being financed, you don’t need to provide as much paperwork as you would for an unsecured loan.
Purchase equipment without cash on hand: If you don’t have the upfront cash to buy expensive equipment, an equipment loan can help you finance a large portion or even the whole cost of the tools you need.
Stay ahead of the competition: A loan for equipment financing allows you to stay on top of the latest technological advancements. Buying equipment helps you stay ahead of competitors and provides you with the tools you need to best serve your customers and increase your bottom line.
Fast approval: In some cases, you can get fast approval for financing, especially if you apply for funding through an online lender. With Backd, for example, you can find out if your business qualifies for a working capital advance in less than 24 hours.
Tax deductions: Thanks to section 535 of the IRS tax code, you can deduct loan interest from your business taxes, up to a specific amount depending on your business revenue.
3 Cons of Equipment Financing
You may need to cover the down payment: While some lenders will cover 100% of the equipment being purchased, some will only cover 80% or less. If you’re unable to cover the full cost of the down payment, then equipment financing might not be the best loan option for your business.
You need to put up the equipment as collateral: Because equipment financing is a type of secured loan, you will need to put up the tools you are buying as collateral. If you want to get business funding without collateral, then there are other financing options that might be a better fit for you.
Equipment can lose value: If you are in a fast-paced industry, like tech, you may need new equipment regularly. In some cases, the items you want to purchase may lose value before you even pay off the loan. In that case, it’s better to consider leasing the equipment instead of taking out a loan to buy new equipment that will be worthless by the time it’s paid off.
Equipment Leasing vs. Equipment Financing
With equipment leasing, you can rent out the tools you need with little or no upfront costs. In most cases, you won’t need to put up any collateral, lien, or personal guarantee. At the end of the lease agreement, you can either return the equipment, renew it, or in some cases, buy it at fair market value.
Long term though, leasing can be far more expensive than buying the tools outright. For that reason, leasing equipment usually makes the most sense for businesses that need equipment for a short while or in a field that has a high equipment turnover.
With equipment financing options, you use a loan to purchase the equipment directly. While it can be less expensive than leasing, it does require making monthly payments for the duration of the loan. But once it is paid in full, you own the equipment outright.
Finding the Right Funding for Business Equipment
Getting a loan for business equipment financing is often easier than getting other types of small business loans. You can get equipment financing from many different lenders, such as banks, credit unions, and the SBA. But in many cases, you will need to put up the equipment as collateral.
If you need to purchase equipment to expand your small business, but don’t want to put up collateral, then consider a working capital advance or a business line of credit from Backd.
Apply now to find out if you qualify.
