Any business owner can attest that having the most efficient and productive equipment boosts the bottom line, regardless of their device. The cost of purchasing or upgrading existing equipment is also a concern for small businesses, and sometimes equipment breaks at the worst possible time. Fortunately, equipment loans can be obtained from both traditional and online lenders. With equipment financing, small business operations can be kept running smoothly. These loans have better rates than other business loans and require fewer requirements.
How does Equipment Financing work?
In this arrangement, your equipment acts as collateral for the loan. Equipment financing is used specifically to purchase equipment for your business. The lender takes possession of the property if the consumer fails to repay the loan; however, if the consumer makes regular payments, the consumer can use the property. A down payment of up to 20% is usually required for equipment loans, like for home loans.
Financing vs. leasing of equipment
It is understandable that some people confuse equipment financing with equipment leasing and may think the two are interchangeable, but they are different financing options. When an equipment lease is signed, the renter (lessee) takes ownership of the equipment for a specified period of time for an agreed-upon price. The equipment is returned to the owner at the conclusion of the lease. A consumer obtains a loan to purchase equipment and takes ownership, while the lender places a lien on the property until the loan is repaid.
There are many equipment financing options, ranging from months to years. Qualified recipients can get a loan amount anywhere between $10,000 and more than a million dollars. Some lenders offer interest rates as low as 3%, increasing from there. In general, traditional institutions like major banks will offer better interest rates and terms, but they are usually only available to established businesses and those with good credit scores.
Is it possible to qualify for an Equipment Loan as a startup?
Obtaining financing for startups can be challenging, if not impossible. As with any loan, consumers with good credit will have more options at better rates. Consumers can check their credit scores at Identity IQ.
There are several documents that lenders require, including financial documents, business licenses, and tax filings. Traditional lending institutions offer better terms but take longer to approve. However, traditional lenders are not viable options for startups. A traditional lender usually requires at least a year of business operation. Startups looking for equipment financing can find it helpful to turn to online lenders. The rates and terms offered by online lenders are not as good as those offered by traditional lending sources, and their application process is faster. Small businesses should explore other financing options before taking out an equipment loan.
Get to know your options
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Business Line of Credit: Consumers have access to flexible funding up to a maximum limit with this financing option. Unlike traditional loans, consumers can borrow as much as they need rather than the full amount. A business line of credit returns or revolves to the maximum limit if the borrower repays the debt on a monthly basis. Despite the fact that these loans carry higher interest rates than traditional loans, flexibility is their greatest advantage. Banks will offer better rates, but they won’t lend to people with bad credit. Online lenders provide business lines of credit for those with bad credit, however.
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Small Business Loans: An alternative to standard loans is a small business loan. These loans have the best rates but can’t be obtained by those with poor credit. The Small Business Administration is a major lender. In a typical year, the SBA provides billions of loans, and during the Coronavirus pandemic, the CARES Act provided $376 billion in additional funding to businesses. Several types of loans are available from the SBA, including equipment loans, up to $5.5 million. The SBA oversees and bears some of the risk on these loans, which are issued by private lenders. The SBA offers excellent rates and terms, but the application process is lengthy, requires extensive documentation, and approval can take months.
Why Equipment Financing is a Good Resource for Small Businesses
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If a small business contractor’s crane breaks down or if a small financial firm’s computer crashes, they cannot afford to use inferior or broken equipment and stay in business. Equipment loans allow businesses to address broken or outdated equipment and maintain their capital for other expenses by replacing broken equipment with the right equipment. When equipment breaks, businesses need to replace it immediately but likely won’t have enough cash to buy a replacement.
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Unlike unsecured business loans, secured loans come with better interest rates and terms because they are less risky to lenders. Once the loan is repaid, the company gains an additional asset.
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Equipment financing has a faster approval process than traditional business loans, which can take months.
A NextGen Business Lending advisor can discuss small business financing options with you based on your individual circumstances.
