Fortunately, there’s another option: obtaining an equipment loan. This type of financing can help you acquire necessary equipment, without having to dip into your business’s cash flow. In this post, we’ll explain what business equipment loans are and provide steps on how you can successfully apply for one.
What is an Equipment Loan?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 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 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 business loan is tied only to collateral, less documentation is required.
- Newer businesses may qualify.
- Business and personal credit requirements are often lower.
- Typically, you can receive funding within a week.
- Terms are often short (five years or less). If you need long term financing, you may need to look for another option.
- Eligibility requirements can still be difficult to meet.
- Down payments are usually required in order to qualify.
4 Steps to Take When Applying for Equipment Financing: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 PositionBefore evaluating lenders, you should be able to answer a few basic questions. Why do you need this type of 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 QualifyAs 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 provide financing to businesses that have been established for a certain number of years.
- Revenues: In order to qualify, you may have to prove that you’re generating a specified amount of income.