Small business equipment loans can help you purchase the machinery and equipment you need to keep operations running smoothly. Plus, you can avoid depleting your company’s reserves and get an extended period to repay the loan. Here’s what you need to know about this form of financing, along with guidance on how to secure funding.
What Is a Small Business Equipment Loan?
A small business equipment loan is a secured form of commercial financing. The equipment you purchase is used as collateral, and the lender can seize it if you fail to make payments.
These loan products are offered by banks, credit unions and online lenders. You may be eligible to borrow up to 100 percent of the equipment cost, and payments (principal and interest) are remitted over an extended period.
Some lenders require a down payment, though, which means you may have to come out of pocket to get approved. Alternatively, you could go with a lender that lets you roll equipment setup costs into the loan. To illustrate, assume the tax, freight and installation expenses are 15 percent of the equipment purchase price. So you could possibly take out a loan for 115 percent of the equipment cost.
Types of Businesses That Typically Use Small Business Equipment Loans
Companies operating in several industries can benefit from small business equipment loans. These include construction, commercial vehicle, dental, dump truck, farming, fitness, heavy equipment, medical, restaurant, technology, telecommunications, trucking, veterinary and logistic-related entities.
How to Use Small Business Equipment Loans to Power Growth
There are several ways you can leverage small business equipment loans to facilitate growth in your company.
Improve Technology and Equipment
Investments in upgraded equipment and technology can help improve operations and facilitate growth in your company. You can also attract more customers or clients to your company with more streamlined processes.
Increase Business Productivity and Efficiency
Equipment loans can also help increase productivity and help improve efficiency in your company. Outdated equipment is often slower, which can hinder production and output. You may also find that customers are less satisfied with the outcomes. But new equipment could equate to improved customer satisfaction, seamless processing, increased accuracy, reduced manual labor and better quality.
Expand Your Business
If you want to increase production, level up your business or expand to new markets, an equipment loan can also assist. Or you can retain your competitive edge by investing in the right equipment.
Benefits of Equipment Loans for Small Businesses
Small business equipment loans offer several benefits.
Easy Application and Approval
Lenders generally offer a simple online application to be considered for equipment financing. Approvals are also generally issued within a few business days with online lenders – traditional banks and credit unions often take longer to provide a response.
You’ll need to meet the eligibility requirements, though, to have the best shot at getting approved. For example, most lenders have annual revenue, time in business and credit score guidelines. Also, prepare to submit financial documents, like recent bank statements and tax returns, along with an equipment quote when you apply.
Flexibility and Scalability
The flexibility and scalability of the small business equipment loan vary by lender and loan product. However, you can generally choose from a short- or long-repayment period, and the interest rates vary.
Business Equity and Cash Flow Preservation
Instead of investing a large amount of your company’s reserves into an equipment purchase, you can use a small business equipment loan to cover the cost. Doing so helps preserve your company’s equity and cash flow. Plus, you’ll have the cash on hand needed to cover unexpected business expenses should they arise.
Tax Deductions
Several tax benefits are available to small business owners taking out equipment loans. These include the Section 179 deduction and interest deduction. Consult with your accountant or tax professional to learn more.
Access to Other Lines of Credit
If you plan to consider other forms of financing in the future, it helps to establish a positive relationship with a lender. A small business equipment loan can serve as a great introduction and pave the way for more lucrative funding opportunities, assuming it’s managed responsibly.
How to Get a Small Business Equipment Loan
You’ll need to shop around with several lenders to find the best deal on equipment financing. Ideally, you want a lender that offers competitive rates and minimal fees.
Finding the perfect lender on your own can be challenging, though. Consider using an online lending marketplace to simplify the research process. You’ll answer a few questions about your business and funding needs. Based on your input, your information will be shopped around several lenders to find the best match.
You can choose to move forward with a formal application and upload the required documents to get an official loan decision. If approved, review and sign the loan documents. Once the loan is closed, the proceeds will be disbursed to you to acquire the equipment your company needs.
Frequently Asked Questions (FAQs)
Below are some frequently asked questions regarding small business equipment loans:
Yes, some lenders require a downpayment to provide you with equipment financing. The amount varies by lender, but it’s typically a percentage of the equipment’s purchase price. So, even if you’re not thrilled about the possibility of having to put money down, there’s an upside. You’ll owe less on the equipment, and your monthly payment will be lower.
Some lenders offer equipment financing to small business owners with credit scores as low as 550. However, a lower credit score also means your borrowing costs could be much higher. Furthermore, you’ll likely need to explore funding options with an online lender, as traditional banks have more stringent credit guidelines. If possible, improve your credit score before applying if it’s on the lower end to give yourself the best chance of qualifying for a small business equipment loan with favorable terms.
Yes, small business equipment loans are secured and require collateral. However, you won’t have to use business assets to get approved. Instead, the lender retains rights to the equipment you purchase as collateral until the loan is paid in full. In the unlikely event you’re unable to make payments and default on the loan agreement, the lender will seize the equipment and sell it off to recoup what’s owed (or pay off the balance).
It’s possible to get an equipment loan as a startup. That said, you’ll likely have better luck using an online lender with flexible lending guidelines to have the best approval odds.
There are several factors to consider. However, the loan payment’s affordability and the equipment’s life span should be at the top of your list. Even if there’s a tremendous need for the equipment in your business, you could create serious cash flow problems if the company cannot afford the loan payments. So, it’s vital to only take out a loan up to the amount your company can responsibly manage. Consider saving up to put money down so you can get a lower monthly payment. It’s equally important to consider the lifespan of the equipment. The loan term you select should not exceed the useful life of the equipment, or you’ll be paying for it after it’s outdated or no longer in use.
