WC.GI/Getty Images: Illustration by Issiah Davis/Bankrate
Key takeaways
- There are three main options for financing business equipment: a loan, a lease or sale-leaseback
- Lenders may offer flexible repayments, competitive interest rates or high loan amounts, so it’s important to compare multiple lenders
- Lenders want to see fair to strong credit, healthy revenue and an established business, though some equipment lenders are lenient with their eligibility requirements
Equipment loans are a good resource when your business needs equipment it can’t buy outright. Equipment loans are backed by the equipment as collateral, helping you get approved for funding and possibly leading to lower loan interest rates.
When getting equipment financing, you’ll need to choose from an equipment loan or lease, depending on whether you want to own the equipment or need the most up-to-date equipment for your business. Then, you’ll need to assess the lender, including its qualifications to apply, and the loan features such as its terms and fees. Follow these steps to get an equipment loan that works best for your situation.
What is an equipment loan?
An equipment loan is a small business loan you can use to help fund equipment for a business. The lender will provide you with a lump sum that you can use to buy, repair or replace equipment. Unlike other loans, you can only use an equipment loan for business equipment. Then, you will repay the loan over a set period of time with interest and fees.
Business equipment is any tangible asset that you use for your business. This includes company vehicles, machinery, computers and furniture. It also includes any equipment you might need when you’re just opening the business, though it can be difficult to find startup loans.
How to get equipment financing
When getting equipment financing, you can find a variety of lenders that offer both loans and leases. Consider the type of financing you need while comparing multiple lenders to find the most cost-effective option.
1. Know what kind of equipment you want and its cost
When getting an equipment loan, the lender will want to know what equipment you plan to buy and how much it costs. This gives them information on the specific equipment that will act as collateral for your loan. The lender may want a quote from an equipment vendor to verify the equipment cost.
Before you apply for an equipment loan, make sure you understand the full loan amount and the monthly payments. Use a business loan calculator to get an idea of your potential monthly payment. Then, you can see whether you can easily manage the equipment loan cost within your business budget.
2. Decide between an equipment loan and an equipment lease
There are three main options for financing business equipment: loans, leases and sale-leasebacks. Small business equipment loans are a good option if you want to own the equipment outright.
On the other hand, equipment leasing works well if your business equipment becomes obsolete quickly. Yet sale leasebacks provide you with capital from the sale of your equipment while still giving you the ability to use the equipment.
Here are the key differences:
| Equipment loan | Equipment lease | Sale-leaseback | |
|---|---|---|---|
| Ownership | Your business owns the equipment outright | You don’t own the equipment, unless you decide to purchase at the end of the lease | Your business sells its equipment and leases it back through the purchaser, freeing up working capital |
| Down payment | Often requires 10 to 20 percent down payment | No down payment required | No down payment required |
| Terms | Loan terms can be up to 5 years | Typically come with a shorter term than a loan | Often longer loan terms |
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3. Assess your qualifications
Online lenders will typically have more lenient requirements than banks or credit unions. However, traditional lenders tend to offer the best interest rates and repayment terms. Typical qualifications to get an equipment loan:
- Time in business: At least two years in business is the standard requirement, although you may be able to qualify for a startup equipment loan. Some online lenders consider businesses as young as six months.
- Credit score: Your personal and business credit score will also play a big role in your eligibility. Many lenders will want to see that each owner has fair credit — at minimum. It may also consider your business credit score if your business has previously taken on debt.
- Annual revenue: A bank will typically require a higher annual revenue than online lenders, such as $150,000 to $250,000. But even online lenders require at least $100,000 in revenue to qualify for their equipment loans.
4. Seek lenders that match your qualifications and needs
Both traditional lenders — like banks and credit unions — and online lenders offer small business equipment loans. There are even lenders that specialize in equipment loans, such as TAB Bank and Triton Capital.
Research several options and look for lenders that best fit your needs, such as:
This is not a definitive list. Check local banks and credit unions in addition to nationally available options to find a lender that fits your business’s needs.
5. Compare lenders and loans
There are several factors to consider when comparing equipment loans and lenders. Consider interest rates, fees, down payments and other factors to compare each lender’s options. Take in the full picture of the loan costs and how the payments will impact your business.
If the lender offers a way to prequalify with a soft credit pull, use it. This will let you compare rates and amounts without hurting your credit score. Features about each loan to consider:
- Loan amount: The loan amount varies by lender, but expect it to cover between 80 and 100 percent of the equipment’s cost.
- Down payment: An equipment loan may require a down payment between 10 and 20 percent, though some lenders like U.S. Bank offer 100 percent financing.
- Interest rate: Both your business’s creditworthiness and current market forces impact business loan interest rates. Rates can range from the single digits to well over 30 percent.
- Repayment terms: Repayment terms typically range from six months to five years, though some lenders offer longer terms. Some lenders may offer multiple payment frequency options, such as monthly, quarterly, semi-annual or annual payments.
- Fees: Common business loan fees include administrative fees, application fees, late fees and origination fees. Pay close attention to the amount of the fees as these can tack on thousands of dollars to your loan.
- Payment reporting: Equipment loans can help you build your business credit score. Confirm with each lender if payments are reported to any credit bureaus, such as Dun & Bradstreet, Equifax or Experian.
- Pre-approval period: Lenders may give you a bit of time to shop around and find the best deal on your equipment.
6. Gather documents and apply
When you are ready to apply, take your time to prepare your loan application and the required documents. You will typically need to provide documents that provide business financial information and prove your business exists. Every lender will list its own documentation requirements, but typical documents include:
- Business license and registration
- Your Employer Identification Number (EIN)
- Business plan
- Business bank statements from the past year
- Business tax returns from the past three years
- Current financial statements, such as accounts receivable, balance sheet and income statement
- Debt schedule
Bottom line
Getting an equipment loan can help you build your business and produce your products or services without having to use up all your capital on hand. You’ll need to research a variety of lenders to find the best rates and to see whether your business matches their qualifications.
Consider the type of loan or lease you need and which lender offers you the best loan terms. You can typically find small business equipment loans with high loan amounts and long or flexible repayment terms, such as offering semi-annual or annual payments. When you’re ready, gather the required documents and apply for your desired equipment loan.
Frequently asked questions
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