Create an account for freeReceive funds as soon as the next day Pay us back over time Pay early and save No subscription fees, origination fees,
or hidden fees of any kind
Equipments Loan Financing
Everything You Need to Know About Equipment Loan Financing
Whether you run a new business or you’ve been in business for many years, most small businesses need to get new equipment from time to time, and for a variety of reasons.
If you’re starting a new construction company, for example, you might need to assemble your inaugural fleet of heavy machinery. If you’re an entrepreneur, you might decide to open up a non-emergency medical transportation business and need to buy an ambulance. A successful restaurateur might decide to remodel their kitchen—or open a new location altogether. A growing painting company may decide to purchase an additional utility van to serve more customers.
Whatever the case may be, these expenditures—particularly when they’re unplanned—can be prohibitively expensive.
Restaurateurs, for example, can expect to spend between $30,000–$150,000 to simply upgrade their kitchen. Few small business owners have that kind of cash sitting in their Rainy Day Fund.
Unless a company has enormous cash reserves in the bank, chances are they’ll have to figure out how to finance most of the equipment and machinery purchases they need to make.
One of the biggest reasons: 60% of small businesses face cash flow problems each year.
When a company needs to acquire new equipment, upgrade existing machinery, or replace old equipment, it can be quite difficult to find the funds needed to do so.
After all, small business owners have to pay operating expenses every month, and they need money on hand to be able to pursue new opportunities, too. That being the case, many small business owners who need equipment and machinery look to outside sources for financing.
Read on in this guide to learn all about equipment loans for your business.
What Is an Equipment Loan?
As the name suggests, an equipment loan is a form of financing that enables small business owners to get the equipment and machinery they need to grow their companies when they’re short on cash.
In most instances, depending on the lender, small businesses are responsible for a down payment of 10%–30%; the loan provider finances the rest. Some lenders, however, may be willing to finance the entire cost of the equipment—at a higher cost.
Unlike traditional bank loans—which may require you to put up your own property to obtain—you don’t have to put up any collateral to secure an equipment loan. In the event you are unable to repay your debt, however, the lender may repossess the equipment you’ve procured and use it to cover its losses.
The equipment loan landscape is quite diverse with many highly specialized lenders. Some lenders exist solely to finance construction companies while others only lend to agricultural businesses, and so on.
Since lenders can repossess your equipment in the event you can’t repay your loan, these financial vehicles are relatively easy for most small business owners to obtain. From a lender’s standpoint, there’s less risk. However, because acquiring new equipment usually translates into increased revenue, many borrowers have no problem settling their debts.
Who Uses Equipment Loans?
Businesses across all industries can use equipment loans. Some examples of these use cases include:
As you can see, equipment loans can help all sorts of businesses get the tools they need to deliver more value to their customers. Now that you understand how equipment loans can be used, let’s take a look at the factors you need to consider when shopping for one.
What to Look For When Choosing an Equipment Loan
There are several factors to consider when shopping for any kind of small business financing vehicle, including equipment loans:
After figuring out which equipment loan criteria is most important to consider for your business, and deciding whether an equipment loan is the right choice for you, then it’s time to begin the application process.
How Do You Get Approved For Equipment Loan Financing?
How exactly do you go about applying for an equipment loan?
While every lender’s application process is slightly different, here’s what you can generally expect you’ll need to do in order to see whether you qualify for financing:
In most cases, applying for an equipment loan is much easier—and faster—than applying for a traditional small business loan from a bank or other traditional financial institution.
Does it make sense for your business to apply for an equipment loan?
To answer the question, you’ll need to weigh the benefits and drawbacks.
Considering The Pros and Cons of Equipment Loans
Equipment loans are the perfect solution for many small businesses—but they don’t work for all of them. To determine whether an equipment loan makes sense for your company, you need to compare the advantages and disadvantages of this popular financing method.
Generally speaking, equipment loans are attainable for many types of businesses. They require slightly less paperwork than some other types of bank loans. Assuming your application is approved, you can have access to the funds quickly, assuming you work with the right lender.
With money on hand, you’ll be able to increase your competitiveness as you conduct business more efficiently, and more effectively. This, in turn, can help your company unlock new revenue streams.
What’s more, the equipment you ultimately buy with the new funds is then valued as an asset on your balance sheet. The same cannot be said of any new equipment you lease instead of buying.
Equipment loans provide tax incentives, too: Thanks to Section 109 of the IRS tax code, U.S. businesses can deduct the full purchase price of compliant equipment and machinery they procure.
Equipment loans, however, are not without their downsides.
For starters, you can never be certain that the equipment you get will actually help you meet your objectives. Even if you make a well-informed purchase, there are many factors outside your control.
Maybe the economy tanks and your construction business slows down. Maybe a competing restaurant opens next door to yours and customers stop coming in. Maybe we experience a prolonged drought and you can’t use your advanced farm equipment even if you wanted to.
In other words, when you take out an equipment loan, you can never be fully certain you’ll end up using the machinery you acquire for an extended period of time. If you end up not needing it, you’ll likely still be on the hook for the balance of your loan—and interest, and possibly other fees, too.
Odds are, depending on your loan provider, you’ll also have to put down a significant down payment to obtain financing. Let’s say you’re looking to spend $80,000 on a utility van. If the lender requires 20% down, that’s $16,000 out of your pocket. There are also interest rates to consider, too. Equipment loans are known to have pretty hefty price tags. Using one to buy equipment will make that purchase more expensive over the long term, compared to buying it outright up front.
As mentioned above, most reputable lenders will run credit checks before deciding whether to sign off on your loan. These “hard” credit pulls can hurt you, since frequent pulls of your business and personal credit scores can lower them. That can make it difficult to secure other traditional forms of financing in the future, should you need to. While it’s possible to rebuild your credit scores after getting dinged, that process can take as long as a year or two. Many small businesses simply don’t have the luxury of waiting that long for financing.
What’s more, some equipment loan lenders may penalize you if you try to repay the full balance of your loan before the term is up. Imagine you take out a five-year loan to purchase equipment. Business takes off impressively, just as you hoped. Your bank account is flush with cash so you decide to settle your debt. Some lenders may charge penalties for repaying early.
Additionally, you may buy the best equipment in the world. What happens if that equipment breaks down? If you’re taking out a loan to get equipment in the first place, it can be difficult to find the funds needed to make any repairs.
Finally, thanks to Moore’s law and the acceleration of innovation, you may end up using an equipment loan to finance new machinery only to find out, in a few months or years, that you no longer need it because a better substitute is on the market—and without it, your company is stuck in the past.
Summary: Pros and Cons
What Other Options Do I Have?
If it doesn’t seem like an equipment loan makes sense for your small business, don’t sweat it. There are many other funding options available you can use to finance the procurement of the equipment and machinery you need.
For a deeper dive into the many business funding options, check out our guide to small business funding.
Here is a quick overview of just a few options to consider:
While an equipment loan may very well work wonders for certain companies, they aren’t perfect for everyone. To learn more about how your business can get the money it needs to buy new equipment or machinery with Direct Draw, check this out.
Better yet, sign up for Fundbox to see if you qualify for financing today. There’s no fee to sign up and no personal credit check to get started. Just share some basic business information and you can receive a credit decision in just hours.