How to Apply for an Equipment Loan
Fortunately, there’s another option: obtaining an equipment loan. This type of financing can help you to acquire necessary equipment, without having to dip into your business’s cash flow. In this article, we’ll explain what equipment loans are and provide steps on how you can apply for one.
Equipment Loans Explained
Let’s say you need to obtain a piece of machinery for your business, such as a commercial oven or computer server. If you don’t have the cash on hand, or don’t want to use the money that’s in your bank account for other costs, you can apply for an equipment loan. This type of financing is specifically designed for purchasing business equipment, and can’t be used for other expenses.
With equipment loans, you can use the asset purchased as collateral, similar to how a car loan works. Equipment loans have several benefits:
- Interest rates are often reasonable due to collateral.
- Since the loan is tied only to collateral, less documentation is required.
- Newer businesses may qualify.
- Credit requirements are often lower.
- Typically, you can receive funding within a week.
There are also a few drawbacks:
- Terms are often short (five years or less).
- Eligibility requirements can still be difficult to meet.
- Down payments are usually required in order to qualify.
How to Apply for an Equipment Loan
Clearly, equipment loans have many benefits. Interested in applying for one? Many lenders offer these loans, including traditional banks and online lenders. First, identify several potential lenders. Once you’ve done that, you’ll have to evaluate each lender before preparing and submitting applications.
1. Understand Your Current Position
Before evaluating lenders, you should be able to answer a few basic questions. Why do you need the equipment? How could it impact your revenues, profits, and overall business? By knowing the answer to these questions, you’ll be more prepared to discuss your options with an equipment lender.
2. Make Sure You Qualify
As you evaluate lenders, check out their eligibility requirements. These will vary from lender to lender, so it’s important to ensure that you meet the basic prerequisites prior to applying. Common criteria include:
- Credit Scores: Typically, you’ll need a score of at least 550 to qualify for an equipment loan, although many lenders prefer scores of 660 or higher.
- Time in Business: Some lenders will only lend to businesses that have been established for a certain number of years.
- Revenues: You may have to prove that you’re generating a specified amount of income.
Keep in mind that some lenders may have further requirements or could have less stringent prerequisites than the ones mentioned above.
3. Determine If You Can Make A Down Payment
When applying for an equipment loan, you may have to make a down payment to qualify. Lenders will want you to be vested in the purchase and receiving a down payment will make them more confident that you’re able to repay your loan. Usually, down payments will range from 5 to 10 percent.
If you don’t have the cash on hand to make a down payment, or don’t meet the above requirements, you may not be approved. Therefore, your best bet will be to find a different lender, improve your financial situation to meet the requirements, or seek alternative financing.
4. Research Different Equipment Loan Options
Finally, it’s time to start applying! The application process will vary from lender to lender. Still, if you’ve already figured out your current position and eligibility, you’re off to a good start.
It’s smart to compare your options at this stage. However, make sure you don’t apply to more than one lender at a time. Why? Because multiple hard credit pulls can hurt your credit score. In addition, make sure you don’t take out another loan if you’re already paying off a previous one, because this is considered “stacking.” Instead, if your equipment loan offer isn’t enough to cover your needs, we suggest looking for a different offer.
Is an Equipment Loan Right for Your Business?
Equipment loans are a great business financing option, due to their low interest rates and quick disbursal times. However, you should still consider the drawbacks, such as shorter terms and the potential that you might not meet the requirements.
Has your business utilized an equipment loan? Tell us about your experience in the comment section below!
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.