Getting an equipment loan can help you acquire or procure more tools needed for offering more services to grow the revenue of your business. According to NerdWallet, you may be able to get these loans from online lenders and banks.
But is this the best type of loan for your business at this time? What are the best ways to utilize the loan to increase the chances of paying it back in time? Find out in this article.
What is Equipment Financing?
Equipment financing is a type of loan, lease, or line of credit issued to small businesses looking to acquire more equipment. By acquiring or purchasing the equipment or machinery, you may be able to scale your business.
Note that this type of financing is exclusive to companies or startups looking for equipment financing for new business. Also, the equipment that can be acquired or purchased with the loan could be small items or larger machinery. It all depends on the type of business and the scope of the market to be covered.
What Can the Business Equipment Loan Be Used for?
Equipment loans, as mentioned before, can be used to finance the purchase of a wide range of business-related items. These include:
- Construction equipment
- Office furniture
- IT equipment
- Healthcare equipment
- Farming machinery
- Landscaping equipment
- Business vehicles
How Do Equipment Loans Work?
Equipment financing is an asset-backed loan. What this means is that the asset or equipment bought with the loan will be used as collateral. Thus, if you fail to meet up with the loan repayment, you may have to forfeit the equipment to the lender.
There are also discrepancies in the loan processing process. While some lenders may be willing to take on the entire financing, others may require you to make a down payment. But if you are not financially buoyant, your best option is to look for equipment financing with no money down payment.
In the case of down payment, the lender may want you to make a 20% to 25% deposit, while the remaining will be financed by the lender.
You may, however, be lucky to get a lender that would be willing to make full financing. Thus, the total cost of purchasing the equipment or items for your business will be fully paid for by the lender.
It will interest you to know that some lenders may also offer much more than that. For example, a lender may want to cover both the financing and the soft costs. The financing, in this case, refers to the total amount required to purchase the needed items. Soft costs, on the other hand, refer to the additional expenses that may be made during the purchase. These include:
- Delivery or transportation of the equipment from the point of purchase to your business premises.
- Cost of assembling and installing the items.
- Warranty coverage
Also Read: Alternatives to Bank Loans
How to Qualify for Business Equipment Loans
How can you qualify for equipment financing so you can purchase the needed items for your business? Here are some of the steps to take:
1. Be Sure Your Business Needs the Loan
Evaluate your business to be sure it needs the loan before applying. The factors to consider include:
- Whether the equipment will help improve the efficiency of your business.
- The lifespan of the equipment, as it relates to your business’ revenue. That is, how long is the equipment expected to be in use and how much revenue can it generate within that time?
- The overall cost of purchasing the equipment.
- Do you need to make a down payment or not?
2. Evaluate Your Credit Score
You may be able to get equipment financing with bad credit but at the expense of making a down payment and paying high-interest rates.
3. Your Industry is Very Important
Businesses in the transportation industry may qualify faster for equipment loans than businesses in the construction industry, which is considered riskier.
4. Length of Doing Business and Annual Revenue
If you have been in business for a year and make an average annual revenue of $50,000-$100,000, you may qualify for the loan.
Benefits of Equipment Financing for Business
The advantages of getting this loan include:
- Competitive interest rates that can be as low as 5.5%
- The loan term is higher, typically between 5 and 10 years.
- Access up to 100% financing for the equipment purchase.
- Conserved cash flow because it frees up cash for operating and capital expenses.
Downsides to Getting Equipment Financing for Your Business
These are some of the reasons why equipment loans may not be ideal for business owners:
- The loan may require a down payment, up to 20% of the total equipment cost.
- The loan usually favors businesses that have been operating for a year or more.
Final Thoughts: Utilize Equipment Loans to Expand Your Business in the U.S.
Getting equipment loans for your business can help you purchase new items that can help bolster your business efficiency. You also get to benefit from tax deductions, flexible loan terms, and fast funding.
Yet, you may have to make a down payment, must have an existing business with potential, and be unable to sell the equipment if it is outdated. If taking equipment financing proves to be difficult, consider equipment leasing, which allows you to use the equipment only for the duration of the rent. You may also be able to renew the lease or terminate the rental agreement.