There is a form of business mortgage loan called equipment financing, primarily for the purpose of buying new or used equipment such as automobiles, machinery, or technology. You will obtain loans for products comparable to up to 100% of the price of the equipment you are trying to acquire. Over time, these loans are then paid back with interest.
The financing of business equipment, comparable to invoice financing, is a type of asset-based financing in which the equipment itself functions as security for the loan. For this purpose, lending for machinery is also cheaper than other forms of small business loans to apply for. For entrepreneurs, or firms with mediocre or low credit ratings, equipment loans may be perfect choices along these lines.
So how does equipment financing work?
Usually, the financing of machinery performs similarly to a business term loan. For the purpose of buying fresh or used business supplies, you take out a loan and pay it with fixed payments back over a set period of time.
As we mentioned above, the amount of money you may receive can equal up to 100% of the value of the equipment you are trying to acquire. Although the amount can differ, based on the quality and nature of the equipment, as well as the lender and your company credentials. Business equipment financing is a type of asset-based financing, implying that the equipment itself is used to back up or secure the loan. Generally speaking, this suggests that you may not have to offer up additional collateral and you will not be required to sign a personal guarantee.
However, you will be expected to have a down payment of 10% to 25% of the equipment funded by you. The higher your down payment, the lower the interest rates you are likely to receive. Overall, equipment financing rates will typically vary from 4% to 40%, depending, of course, on the lender, the qualifications of your company, and the equipment you are buying. Keeping this in mind, the terms of repayment on financing equipment are normally five or six years, but certain lenders may provide longer terms, up to 10 years. In addition, some lenders will focus the repayment conditions on the equipment’s projected lifespan, but they are also entitled to claim their loss if you default on the loan and they have the ability to seize the equipment and liquidate, or sell, it.
Equipment Financing vs. Equipment Leasing
It is important to distinguish the difference between equipment financing and equipment leasing in order to understand how equipment financing works. While there are some subtle differences between the two, the primary differentiation is that you own the equipment at the end of your repayment period with an equipment loan. With equipment leasing, on the other hand, at the end of the term, you do not own the equipment. Alternatively, you have the option to purchase the machinery directly or enter into a new lease for the machinery you need, similar to leasing a car. Generally, in the long run, equipment leasing is more costly than equipment financing.
Pros and Cons of Business Equipment Financing
When it comes to it there is no question that equipment finance is a great choice if you are searching for funds to buy equipment for your business. This method of finance will also provide the most ideal rates and requirements for equipment-specific financing. However, equipment financing might not necessarily be the perfect option for every business and circumstance. We will go through all the pros and cons of equipment financing in order to help you decide whether it is right for your needs or not.
PROS
Fast funding for equipment purchases: Although it can take weeks or months to finance certain other forms of business loans (such as bank and SBA loans), equipment loans are usually considered a very quick method of financing.
Equipment itself functions as debt collateral: One of the greatest advantages of loans for equipment is that they are self-collateralizing. Therefore the machinery itself secures the debt instead of needing to offer up real estate or other commercial properties as leverage. In addition, you will also be able to negotiate with the provider to avoid signing a personal pledge on the loan since the machinery itself acts as collateral.
Easier criteria for qualification: relative to other forms of business mortgage loans, machinery finance is far easier to qualify for. This is why loans for machinery are a perfect choice for start-ups or firms with poor credit scores. Generally, since the machinery secures the debt, lenders are also able to partner with firms with lower credentials, rendering it less expensive for lenders owing to the self-securing aspect of business equipment lending. In addition, most machinery lenders submit to company credit bureaus your payment background and ensuring on-time payments can boost your credit history and make it easier for you to apply for more loans in the future, which is especially useful for newer firms and firms with bad credit.
Affordable interest rates: Machinery funding rates usually vary from 4% to 40%. Even Though the interest rates do vary, they are generally affordable. You can earn rates that are comparable to bank or SBA loans if you slip into the lower end of the interest rate spectrum. In addition, by having the Section 179 corporation tax deduction, you will be able to save more money on the expense of your supplies and your income.
Limited documents and fast application process: funding of business machinery is accessible from both banks and alternative lenders. As you would imagine, there would be the quickest and most streamlined processes for new internet lenders, but in general, applying for equipment financing is a quick and easy procedure. Again since lenders are not as concerned with the credentials of your company, you would typically find minimal criteria for paperwork, especially relative to other forms of financing.
CONS
By the time the loan is fully repaid, the equipment could be obsolete: Simply the biggest downside to business equipment financing is that by the time you have repaid the loan and you own the equipment, the equipment could be outdated or obsolete. This is one of the explanations why as we described above, certain business owners opt for machinery leasing instead of financing. Furthermore, it is important to remember that you do not own the machinery until you have paid off the loan.
A down payment may be required: In some cases, you will need to put down 10% to 25% of the value of the equipment to access funding. It may be more difficult for you to get equipment financing if your company does not have the money required for the down payment. If your down payment just meets the criteria of what is required, this might increase your interest rates.
Applicable only to companies that need to buy equipment: equipment loans are, of course, a very specific type of financing that meets a very specific need. Therefore you will have to explore your other options if you need financing for another business purpose.
Equipment Loans for Startups
For several start-up firms, equipment finance, as we have described, is a worthwhile choice, as these loans are simpler to apply for relative to other forms of business loans. Again in order to be eligible to obtain equipment loans, with the equipment acting as collateral on the loan, you do not actually require several years in the company or excellent finances.
Of course, for all of these loans, it is necessary to note that you are more likely to encounter higher interest rates relative to older firms. However, that being said, the stronger your company’s financial statements are the more freedom you would have to negotiate with the investor as a start-up to access the most ideal costs and terms.
Who Qualifies for Equipment Financing?
Many organizations may qualify for machinery finance loans. How much you qualify for and the interest rate you would pay depends on the size of the equipment, the financial background of the company, and your credit score. However, if the credit record is less than stellar, equipment finance may be an amazing choice, as the equipment serves as collateral.
In reality, lenders of equipment are only as concerned about what is securing their loan as with your history of borrowing. So if you are looking to spend your small business equipment loan on a high-value (and value-retaining) piece of equipment, then equipment lenders might be able to partner with you even if your finances are not flawless.
How To Get Financing for Equipment
So if you think one of these top loan choices for equipment could be right for your business, you might be wondering how to actually get the funding you need.
So if you think one of these top loan choices for equipment could be right for your business, you might be wondering how to actually get the funding you need.
Find the equipment you would like to buy: Identifying and selecting the piece of equipment you would like to buy is the first prerequisite for getting equipment financing. Many lenders will request that you give an equipment quote in the application form, as well as information regarding the equipment and its state. It is important to know as much as possible about the equipment you want to purchase. Test your qualifications: You will be able to start looking at your choices and deciding where you would be able to apply after you have completed the required homework on the equipment you would like to buy.
As seen above, the basic conditions you would need to fulfill to apply for the funding of business equipment will differ depending on the provider, but criteria (annual salary, period in business, credit score) would normally be far more versatile relative to other forms of loans. However, with this in mind, the stronger your financial statements are, the more likely you will be to access the most ideal rates and conditions.
Complete your application: Eventually, you will be able to plan and apply your loan application after you have assessed your credentials and qualifications and then you can decide which lenders are the right choices for your firm.
Usually, very simply and conveniently, you would be able to complete your machinery loan application online. Financing of machinery typically requires limited paperwork and a simplified method of application. However, this being said you should expect to provide any if not any of the following:
Driver’s license
Voided business check
Bank statements
Credit score
Business tax returns
Equipment quote
Online lenders will typically process and finance applications for business equipment funding in only a few days, often quicker. On the other side, if you qualify for a machinery loan from a branch, you will typically have a longer period to finance it.
Undoubtedly, you will want to review options with different lenders and guarantee that you receive the strongest, most favorable rate for your company before you sign an equipment loan agreement and enter the closing process.
In Summary
Equipment finance is a perfect option for financing sales of company equipment. Although some forms of loans may be used to fund these transactions, equipment-specific lending mostly comes with competitive rates, adjustable conditions, and rapid financing periods. In addition, equipment loans are far more available to start-ups and companies with poor credit as a self-collateralizing source of funding.
However, that being said, equipment finance would not be correct for any company especially if you are a highly qualified company that can reach much lower rates through a long-term bank or SBA loan. Ultimately, however, to find the right fit for your business needs, you will want to take the time to analyze and evaluate all of your business loan choices.