Equipment financing: How a term loan can help you upgrade your business


Need a lump sum of cash to buy equipment or make a large business purchase?

Investing in quality equipment or other business upgrades can be critical to boosting productivity and operational efficiency, and ultimately to the ongoing success and growth of a business. However, while these upgrades are beneficial for small businesses, the associated costs are often prohibitive, requiring substantial upfront investment. Term loans can help by providing the funds necessary to make an outright purchase.

When growing your business is a priority, having the right equipment is key. So how can small businesses access the funding needed for equipment upgrades, renovations, or expansion? If the cost of upgrading your business presents a challenge to your cash flow, depending on the specific needs of your business an equipment or term loan may be the answer.

What is equipment financing?

Nearly eight in ten U.S. companies (79 percent) use some form of financing when acquiring equipment, including loans, leases, and lines of credit (but excluding credit cards).

Simply put, equipment financing is funding that enables businesses to purchase the equipment required for business operations and growth. By providing the funds needed to purchase equipment, this type of lending can help free up working capital.

As a small business owner, you have multiple viable options you can explore to obtain financing for equipment and for other growth initiatives. Determining the right one depends on the needs of your business and many other factors. Consider the following:

  • Approximate loan amount needed
  • Business revenue
  • Repayment terms
  • Credit scores (personal and business)
  • Projected return on investment (ROI)

Now let’s take a look at some of the financing avenues available:

Term loans

Term loans are a great option for small business owners in need of quick access to cash to upgrade their businesses. Here’s why:

  • Term loans provide you with a lump sum upfront, which you’ll repay, along with interest and fees, over a fixed period.
  • They can range from short-term loans with repayment periods of one year or less, to longer-term loans with repayment periods up to 10 years.
  • You’ll enjoy greater flexibility in the ways you can use the funds from a term loan in comparison to equipment-only loans.
  • Term loans enable businesses short on cash flow to invest in equipment, but also the opportunity to maximize revenue growth. For example, you could use the funds from a term loan to extend operations, buy equipment, or finance new marketing or advertising initiatives.
  • An additional advantage of using a term loan to fund large equipment investments is that equipment owned by the business can be claimed on the business’s tax return as a depreciating asset. Depreciation measures the value of an asset over time as it ages from wear and tear. Business equipment qualifies for the write-off if it is used to generate income, and if its lifespan is expected to be more than one year.

Equipment loans

As the name implies, equipment loans exist for a single purpose: to finance your equipment. The equipment itself acts as collateral and when you’re done making payments, you will own the equipment. Until then, if you default on the loan, the lender can take back the equipment to help recoup their costs.

Equipment is typically quite expensive and outright investment can quickly drain a business’s bank account. By providing the funds needed to purchase equipment, this type of lending can help improve a business’s working capital for other expenses.  Equipment lenders are usually more flexible when it comes to credit scores and financial history so it may be quicker and easier to qualify for an equipment loan — especially since the equipment you are purchasing is often used as collateral to secure the loan. On the other hand, more traditional lenders like a bank or credit union typically require higher credit scores, extensive financial history, and other documentation.

However, as with any other form of financing, there are also a few potential drawbacks to equipment loans. These include restrictive usage terms, high down payment requirements, maintenance liability, and depreciation risk. Unlike other types of loans, which offer more flexibility in how you can make use of the borrowed funds, equipment loans are limited to equipment purchases.

Equipment leasing

Similar to leasing versus buying a car, rather than buying your equipment, you also have the option to lease it for a set period of time. In this scenario, the lender owns the equipment, and you are simply paying to use it. Unlike equipment financing, equipment leases generally do not require down payments or collateral and may have lower monthly installments than an equipment loan.

Leasing is also a good option for you if you plan to buy the equipment but need more flexible payment terms, or if you think you will need to replace the equipment at the end of the lease. However, depending on the purchase payment terms at the end, leasing could end up costing you more in the long run. Additionally, when you own a piece of equipment, you can take advantage of Section 179 depreciation tax benefits, and it will be yours to sell if you decide you no longer need or want it in the future.

In summary

There are many different avenues to obtaining equipment financing for business upgrades, expansion, and equipment purchases. There is no one-size-fits-all solution, and the best one depends on the unique needs of your business.

However, just as you would when making any large purchase, you can make sure you’re getting the best possible financing deal for your business by thoroughly comparing terms between lenders before making any commitments.

Are you a small business owner in need of funding? Whether you’re trying to expand or looking to buy equipment and inventory, a business term loan may be the solution you need. The loan can be used to invest in the growth of your business, and then the returns can help you to repay the loan and interest over time.

Not sure where to start? The good news is you don’t have to step into a bank or even leave your desk chair to shop for term loans for your business. Online lenders can make it easy and convenient to apply from your smartphone or computer, and Fundbox may be able to help. Apply now and find out in minutes if you are approved and get funding as soon as the next business day.

Disclaimer: Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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Tags: ConstructionFinancing