Over the last 20 years, business equipment spending has increased in every category. The amount of money going into information processing equipment grew almost 10 percent. By contrast, businesses spent over two percent more on industrial machinery.
The result is the same. Businesses are spending more money on equipment. Whether it’s healthcare technology or new construction vehicles, businesses need to invest.
If you need to buy new equipment for your growing business, you’re likely wondering where to find the funds. Chances are many other businesses have taken out an equipment loan.
In this guide, we’ll go over the basics of equipment loans. We’ll look at everything from how they work to why you want one.
We’ll also simplify the application process. With this information, you have the best chance of getting the financing you need.
How an Equipment Loan Works
Business equipment financing usually comes in one of two forms. You could decide to lease equipment if you can’t afford to buy. Your other option is a loan.
Equipment loans are like other traditional loans. You’ll apply for a particular amount of financing. If they approve, the lender will grant you the money.
They’ll also set out the terms of financing, such as how long you have to pay back the loan. They’ll also determine the interest rate. This will set your monthly payments.
An equipment loan is something like buying a house or a new vehicle. Most lenders will ask you for a down payment. This is usually a percentage of the purchase price, say around 10 or 20 percent.
The loan amount will be equal to the remaining 80 or 90 percent of the price tag.
Just like you don’t need collateral for most auto loans or mortgages, lenders don’t usually require a guarantee of this kind. If you fail to pay your loan, they can repossess the equipment itself.
Leasing vs. Loans
We mentioned that leasing is another option you have for heavy equipment finance. This option could be a good fit if you don’t have much capital for a down payment.
Most leases don’t ask for a down payment or, if they do, a smaller one. When the lease ends, you can return the equipment.
For most business owners, leasing is a short-term solution. If you plan to be in business for some time, a more traditional loan may be the right choice.
Terms and Amounts
The terms on equipment loans usually depend on the lender you’re working with. Interest rates are often higher than five percent, but lower than 10 percent.
The terms of repayment are like auto loans. You may have anywhere from one to five years to pay back the loan. Some loans can even extend up to 10 years, depending on the amount and the lifetime of the equipment.
Business owners need loans to invest in equipment because it’s expensive. Farm equipment like tractors and the heavy equipment for mining and construction is expensive.
Almost any business needs equipment, though, whether it’s a restaurant or a farm. A loan might be the right financing option.
The lender will often determine how much loan you qualify for. Some lenders may grant you millions of dollars, while others will offer $100,000 or $250,000. Lenders use many factors to assess the amount they’ll offer.
Qualifying for a Loan
One of the first things to do when you want to apply for financing is to take stock of the business’s financial health. If you have poor credit or have filed for bankruptcy, you’ll encounter more roadblocks as you try to get funding.
Some lenders specialize in funding businesses that have credit scores under 600. Some lenders may deal with those who have even lower credit scores. Others won’t deal with you at all.
The same is true of how long you’ve been in business and how much you bring in. Some lenders work only with established businesses with revenues above a certain amount.
If you don’t meet the requirements for one lender, don’t worry. There are many other lenders out there. Some likely specialize in serving clients like you.
Submitting an Application
Most lenders need to see the paperwork before they can make you an offer. The first thing to do is assess your own needs. Ask yourself:
- What kind of equipment are you buying?
- How much does it cost?
- How long will it be in service for?
- How much of the cost can you cover upfront?
- What monthly payment can you handle without straining cash flow?
Once you’ve determined these numbers, you can prepare a loan application.
Lenders will want to know all about your business. They’ll be particularly interested in the financial health of the business. You may be asked to provide:
- Cash flow statements and projections
- Income statements and projections
- Tax returns, for yourself and the business
- Credit reports, for yourself
- A business plan
Always check with the lender to see exactly what paperwork they need from you. Submitting the right documents will help them approve the loan sooner.
The more information you give, the more accurate their assessment of the business. Remember that loaning you money is a risk for them. If the business isn’t in good financial health, there’s a chance you may not be able to pay back the loan.
There are ways you can lower the lender’s risk. With equipment financing, the lender always has the option of repossessing the equipment. This lowers their risk.
Making a down payment is another way of lowering their risk. The more money you put down up front, the smaller the loan is. This also benefits you, because it makes your monthly payments more manageable.
Finally, a larger down payment may convince the lender to give you a better interest rate. Some lenders will be willing to fund the entire cost of the equipment, but they’ll charge a higher interest rate.
Finding the Right Lender
As we mentioned, there are many equipment financing lenders out there. Some lenders off equipment loans as one of their many services. For others, farm equipment loans or heavy equipment loans are all they offer.
Be sure to shop around and see which lenders specialize in your industry or area. You should avoid applying to lenders that specialize in financing another industry. A construction company shouldn’t apply to a lender that offers manufacturing equipment loans.
Keep in mind the lender’s criteria as well. One lender might specialize in construction financing, but they want to fund startups. Another lender is probably the right choice for a more established construction firm.
One option you may have is the Small Business Administration. The SBA runs several loan programs, some of which can be used for equipment financing. An SBA-backed loan guarantees part of the loan, which eases the lender’s mind.
SBA loans can be a bit more difficult to get. Both the lender and the SBA have to review your application to approve you.
Whenever you talk to a lender, be sure to review the terms of their contract. You’ll want to know about the term length, the interest rate, and the repayment schedule.
Also, be sure you ask about prepayment penalties and penalties for non-payment. Insurance is another factor to look at.
With business equipment financing, you’ll want to review terms about maintenance and alterations. Since some business equipment will be in service for quite some time, you’ll need to maintain it.
Who handles these costs? You may also upgrade the equipment over its lifetime. Check the fine print to see what’s allowed under the terms of the loan.
Benefits of Equipment Loans
After reading through all this information, you may wonder if an equipment loan is the right choice for your business.
Loans have many benefits for businesses, beyond getting the equipment you need. They provide:
- Quick access to funds. Many loans are available in just a few days, versus 30 to 90 with other types of loans.
- Up to 100 percent of the costs. You’ll trade-off higher interest with more funding. Removing the down payment requirement can help you access equipment now.
- More manageable costs. It’s difficult to buy a piece of equipment for $100,000 or $200,000 without interrupting cash flow. Loans make those payments easier to handle.
- Flexible terms. You might choose a loan because it allows you to pay back the costs of equipment over time. You can typically pay them back as fast as one year, provided your cash flow can handle it.
As you can see, equipment loans offer a way to help you get the equipment you need without breaking the business.
Find the Financing You Need
If you need an equipment loan for your business, get in touch with us for a quote. We can help you find the right financing option for your specific equipment needs. The funding you need could be well within reach.