The Pros and Cons of Equipment Loans
Unfortunately, most equipment is expensive, and with the myriad of other business expenses you must afford, it might be too costly for you to purchase. Often, large equipment purchases require a down payment, and if you can’t afford it, your business may be faced with a financial qualm.
Luckily, that’s why business owners turn to equipment loans for their financing needs!
What Is Business Equipment Financing?
Essentially, equipment loans are a financing product that can only be used to purchase business equipment. Therefore, if you need financing for additional business costs such as inventory, payroll, or rent, you’ll need to seek a traditional business loan.
Deciding if an equipment loan is right for your business will depend on several factors. However, if you’re reliant on expensive equipment to run your business, equipment financing could be a good option.
To help you evaluate if an equipment loan is the right funding option for your business, we’ve compiled a list of the pros and cons of equipment loans. After reading this post, you can determine if this type of business financing will benefit your company.
The Pros of Equipment Loans:
1. Receive 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 business equipment loans allow you to borrow money specifically to pay for equipment, you don’t have to wait until you have the cash on-hand to make an important purchase or repair equipment that you already own.
Having this money can improve your business’s bottom line; waiting to purchase, lease, or repair equipment could severely hurt your company’s annual revenue, especially if the equipment is crucial to your operations. For instance, if your restaurant’s oven breaks, you’ll need to repair or replace it as soon as possible.
2. 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 $1,700 over a 5-year term. Without an equipment loan, you’d need $100,000 in cash immediately to buy the equipment outright.
3. No Need for Additional Collateral
To qualify for a term loan, you could be required to put up collateral that you already own, such as real estate or vehicles. This generally isn’t the case with an equipment loan. Usually, alternative and online lenders will be satisfied with using the equipment you’re purchasing as collateral for the loan. This can be very beneficial, because this significantly lowers your downside risk.
4. Increase Your Business’s Future Sales
If you receive an equipment loan, it could improve your business’s overall productivity.
For instance, if you own a manufacturing company, having additional machinery could help you complete orders faster. You might even be able to take on additional customers, which would boost your bottom line.
By receiving an equipment loan, you’ll be investing in your business and may even be able to earn more money in the long run!
The Cons of Equipment Loans:
1. Usage Is 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.
For example, if your company needs financing for construction equipment but also wants to use the funds for payroll, this isn’t the right type of loan for you in this situation.
Other types of additional working capital, like a merchant cash advance, lines of credit, or a credit card give 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.
2. 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 business credit history, you’ll likely be able to find a lower interest rate by taking out a traditional loan.
Before applying for any type of financing, we suggest checking your credit score. That way, if you have bad credit, you can correct it prior to applying.
Still, some traditional lenders can be slower to provide a loan amount (up to 30 to 90 days) and will require more documentation.
In addition, many lenders have a time in business requirement, meaning you may have to wait until you’ve been operational for a certain length of time. Therefore, if your equipment needs are pressing, you may not be able to wait for a traditional lender to approve your application.
3. You Own the Equipment
Fully owning business equipment could be a pro or a con, depending on how you look at it. When you take out a small business loan for equipment, 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 long term equipment, 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.
Conclusion: Determine if Business Equipment Financing is Right for You
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 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.
Editor’s Note: This post was updated for accuracy and comprehensiveness in May 2021.
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.