Pros and Cons of Equipment Loans
To help you evaluate if an equipment loan is a good fit for your business, here’s a list of the pros and cons of equipment loans.
Money to Buy, Repair, or Lease Equipment
Even if your business is well-established, chances are you don’t have ample cash available to spend on equipment. Fortunately, cash for equipment is exactly what these types of loans provide. Since equipment loans allow you to borrow money to pay for equipment, you don’t have to wait until you have the cash on-hand to make an important purchase.
Spread the Cost of Your Purchase
For any business owner, cash flow is a constant concern, and equipment purchases only complicate cash flow issues further. However, because an equipment loan enables you to spread your cost, this type of loan helps solve the cash flow problem presented by equipment purchases.
For example, let’s say you need to purchase a large format printer for multiple business locations, and the total cost is going to be $100,000. With an equipment loan, you could put 10 percent down, and pay an annual interest rate of six percent over five years. That means you’d be paying $10,000 on day one and making monthly payments of about $1700 over 5 years. Without an equipment loan, you’d need to come up with $100,000 in cash immediately to make that purchase.
No Need for Additional Collateral Besides the Equipment
To qualify for a loan, you could be expected to put up collateral, such as real estate or vehicles. This generally isn’t the case with an equipment loan. Usually, lenders will be satisfied with just using the equipment you’re purchasing as collateral for the loan. This can be very beneficial, because this significantly lowers your downside risk.
Restricted to Equipment
As the name implies, equipment loans can only for be used for equipment. That means you won’t be able to use the proceeds from an equipment loan to cover payroll expenses, rent, or anything else. Other types of financing, like a merchant cash advance or a line of credit, allow you the flexibility to use the financing as you see fit. Of course, this isn’t a very serious drawback if the only thing you need the cash for is to purchase equipment.
Higher Rates Than Traditional Loans
Equipment loans typically offer favorable interest rates, as low as five percent, according to US News. However, if you have excellent credit and a strong business history, you’d likely be able to find a lower interest rate by taking out a traditional loan. Still, some traditional lenders can be slower to provide funding (30 to 90 days) and will require more documentation.
You Own the Equipment
This could be a pro or a con, depending on how you look at it. When you take out an equipment loan, you’re borrowing money to purchase and own equipment. An alternative to this is equipment leasing. With an equipment lease, you make monthly payments to use the equipment, and then return it when the lease is over.
For equipment that may become obsolete or depreciate relatively quickly, owning rather than leasing could be expensive for your business. However, for equipment that will last a long time, owning is usually more affordable. William Sutton, president and CEO of the Equipment Leasing and Finance Associations recommends leasing if you need the equipment for less than 36 months.
Unlike many other types of financing, equipment loans are meant for a very specific purpose. While that prevents these loans from being versatile, it also means that—for the right person—equipment loans can be extremely effective. To help yourself make the final decision, take the time to conduct research, understand your most pressing business needs, and determine the type of equipment your business requires. That way, you’ll have all the information you need to make the best decision for your business.
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.