Only a handful of small business owners have the resources necessary to pay cash for the equipment essential to their operation. If this is the situation you’re in, you may want to learn more about equipment financing, an easy solution for business owners who intend to grow their businesses. There’s virtually no end to how you can use equipment financing in all sorts of industries. So whether you need to fill your gym business with exercise equipment, your dental office with X-ray technology or your food truck with a new grill, equipment financing may be for you.
How Does Equipment Financing Work?
While equipment financing is one of the most basic types of business loans available, you may still be curious about how equipment financing works. Equipment financing is a loan used to pay for your equipment. It’s that simple. The equipment that qualifies for this type of loan is the tangible assets you need to run your business, from furniture and refrigerators to power tools and computers. It’s very common, and some would say necessary, for most small business owners in a wide range of industries. It’s worth noting that you own the equipment. You are not leasing it. Be aware that you can’t borrow more money than the cost of the equipment. However, since you can use the equipment as collateral on the equipment loan, the interest rate may be lower.
You may be asking, is it hard to get financed for equipment? The answer to that question depends on many factors, but in general, equipment financing is easy to acquire. Online lenders are best suited to respond quickly to your application and provide funding in just a day or two. While an equipment loan is easier than some types of business loans to qualify for, there are some expectations for small businesses like yours since you may be borrowing several thousand dollars. So, how do you qualify for equipment financing? Many lenders require that you have been in business for at least a year, don’t have a bad credit score, and have annual revenues above $50,000. How long you finance new equipment or used equipment will depend on the type of funding and the lender you are using, together with your creditworthiness and other qualifications.
What Kind of Business Equipment Can You Finance?
In simple terms, if you need the equipment for your business, you can finance it. Both startup businesses and established businesses routinely use equipment loans for all sorts of business equipment. Having the right equipment you need for your business is too expensive to pay for out of pocket, and you likely need any cash you have to cover operational costs for your small business. Think about the wide variety of equipment it takes to operate your business. There is likely equipment financing for all of it. In addition to traditional types of equipment you might think of, such as vehicles and heavy-duty equipment, there are several more types of equipment you can use equipment financing for:
- Restaurant Equipment
- Manufacturing Equipment
- Medical and Dental Equipment
- Construction Equipment
- Office Furniture
- Computer Hardware and Software
Pros and Cons of Equipment Financing
As you consider your options for growing your business, be sure to weigh out the pros and cons of equipment financing. As a small business owner, you would rarely have cash on hand to pay outright for the right equipment. However, it’s definitely an option if you have built up cash reserves. Before you decide, think about the pros and cons of equipment loans.
Perhaps the biggest pro of equipment financing is that you own the equipment rather than lease it. Also, equipment financing is easy to get from banks, credit unions and online lenders. However, the lender will expect you to demonstrate that you will be able to make payments by virtue of a good credit score and strong sales record. Another positive of equipment financing is that you can use the equipment you buy as collateral on the loan. This is especially beneficial to new businesses that may not have other assets to offer the lender. A significant downside of equipment financing is that your equipment ends up costing more once you factor in interest payments on the funding. It is a loan, after all. Another con of equipment financing is that you may be expected to make a down payment on the equipment purchase.
How to Use Equipment Financing to Grow Your Business
Equipment financing is a practical way to grow your business and may be easier to qualify for than an SBA loan or term loan. With a loan to pay for the equipment you need, you can be more focused on finding ways to reach more customers and expand your business. In addition, equipment financing can free up other resources for marketing, hiring staff and monthly rent.
Build Equity in the Equipment You are Buying
With equipment financing, you own the equipment rather than lease it. That means if you grow your business to the point that it is appealing to a buyer, the equity in your business may be larger than it would be otherwise. Equipment indeed depreciates; however, you can’t sell a restaurant that doesn’t have ovens and a walk-in refrigerator. So, think of your equipment financing as a way to build equity in your business.
Purchase Inventory to Increase Sales
To grow and expand your business, you need to purchase inventory to increase sales. Adding inventory is especially important if you need to expand your product line or pivot with new products to meet customer demand. Using equipment financing may allow you to use other resources to buy that inventory.
Use Equipment Financing to Manage Cash Flow
If your business has normal fluctuations in sales over the course of the year, or you operate a seasonal business with weeks or months of no sales, you might consider using an equipment loan to manage cash flow. As long as you are able to make the loan payments, borrow money to pay for equipment necessary for your business and then use cash flow to cover other expenses.
Supplement Your Working Capital
Working capital loans are very common for businesses of all sizes, and equipment financing can be used to supplement your working capital. Suppose you have financed equipment, office furniture, computer hardware and other types of equipment necessary to run your business. In that case, it may free up working capital for other business expenses, such as payroll, rent and advertising.
Digitize Your Business
You may be in a situation where, in order to remain competitive in your market, you need to digitize your business. This may require you to buy computer hardware and software in order to accomplish your business goals. You can use equipment financing to pay for computers, tablets, card readers and more. Perhaps you need to update your business website to accept online orders and secure credit card payments. Once you have made these upgrades, you will be able to pay for the equipment you need to make it happen.
