Business Equipment Financing: Is It Right For Your Business?
In this post, we’ll review what business equipment loans are and how they compare to other business funding products.
What are Business Equipment Loans?
Business equipment loans are designed to help business owners purchase equipment for their business. Whether you need a new oven for your restaurant or mower for your landscaping company, they can keep your business running smoothly.
If you take out an equipment loan, you’ll likely receive a lump sum of money upfront that’s usually a percentage of the equipment’s cost. Then, you’ll repay the business loan with interest via periodic payments. The equipment will serve as collateral against your debt, so if you default on your loan, the lender will seize it.
Business Equipment Loans vs. Other Types of Loans
Compared to other types of business financing, like SBA loans, for example, business equipment loans are usually easier to qualify for. This is because the equipment that acts as collateral makes them less risky for online lenders.
Business lenders know that if you don’t pay back your small business loan, they’ll be able to repossess your equipment. The easier qualification requirements are great, especially if you’re a new business or don’t have the best business credit score.
Another key difference between business equipment financing and other business loans is the fact that the funds must be used toward equipment.
A business financing lender will expect you to take the money that they lend you and purchase the equipment. If you’d like to pay for inventory, a new office building, payroll, or anything else, you’ll need to find an alternative financing option.
In addition, business equipment loans can be more expensive than other types of financing like SBA loans. Their interest rates are known to be higher so if you have good credit and have been in business for some time, you may save money with a different loan.
The Pros and Cons of Equipment Financing
Just like every other financial product, equipment loans come with benefits and drawbacks including:
The Pros of Equipment Loans
- Easy to Qualify For: You can get approved for an equipment loan, even if you have no credit history or a bad credit score.
- Fast Funding: If you need to purchase or update equipment as soon as possible, you’ll be pleased to learn that most equipment loans offer fast funding, sometimes within 24 hours or a few business days.
- Reduces Cash Flow Issues: With equipment financing, you’ll spread the cost of your equipment over time and be able to avoid cash flow shortages that impair operations.
- Boosts Future Sales: As long as you purchase the right type of equipment, it can help you attract more customers and increase sales.
- Saves on Taxes: An equipment loan may cut your tax bill as most equipment purchases are tax deductible.
The Cons of Equipment Loans
- Higher Rates: Unless you have stellar credit, you may have to settle for a higher interest rate than you’d be able to land with a different type of loan.
- May Need a Down Payment: Some lenders who offer equipment loans ask borrowers for a sizable down payment.
- Can Only Be Used for Equipment: As the name suggests, equipment loans may only be used to buy an oven, printer, excavator, or other type of equipment for your business.
- Risk of Losing Equipment: If you fail to repay your loan, your lender may seize your equipment.
- Equipment May Become Outdated: By the time you pay off your loan, you may find that your equipment is no longer what you need for your business, making equipment leasing a smarter solution.
Are Equipment Loans a Good Funding Option?
Whether or not an equipment loan makes sense for your business depends on a few factors. To help you answer this question, ask yourself the following:
- Do I need a term loan to purchase equipment?
If you find that you want working capital to cover other business expenses, an equipment loan won’t help you. Its funds can only be used to pay for business-related equipment.
- How long will I use the financed equipment and what will I do with it after?
You may be better off leasing equipment if your financing contract exceeds the amount of time you plan to use the equipment. If leasing isn’t available to you, opt for an equipment loan with a short term.
- How soon do I need the funds?
If you need the money sooner rather than later, you’ll have to explore business equipment financing options and find a lender that can meet your preferred time frame.
Conclusion: An Equipment Loan Can Help You Grow Your Small Business
Equipment loans may be a great choice if you want to buy a piece of equipment for your business but don’t want to pay for it upfront.
Before you move forward with the loan application process, however, do your research. Compare the options at your disposal and read the fine print. Once you take out an equipment loan, do your best to follow your payment schedule and pay it off.
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.