How Does Equipment Financing Work | Now Easier

As a small business owner, you understand the importance of quickly and affordably acquiring, upgrading, or replacing equipment necessary to your daily operations. While purchasing outright can strain cash flows substantially, financing equipment could provide a solution to keep your business functioning at peak levels or meet growing demand.

At Equipment Leasing Services, we will give an overview of equipment financing. This includes rates and terms you should expect in today’s marketplace, as well as basic qualifications to qualify for such loans and how to obtain one.

How Does Equipment Financing Work?

Equipment financing refers to loans used for purchasing business equipment like an oven, vehicle, or copy machine. When taking out such a loan, monthly payments include interest and principal over a specified term.

As security for the loan, your lender may impose a lien against equipment as collateral against debt owed. Once paid off in full, this lien is removed from ownership. Your lender may also lien other business assets or require personal guarantees as security; should you fail to repay, they could repossess them and your assets under any personal guarantees that were given; you’ll want to carefully read through and understand any loan terms before agreeing.

Assuming you’re opening up a restaurant, you will require equipment like commercial range, ovens, and refrigeration units – these would cost an estimated total of $75,000 in total; therefore, an equipment loan equal to 80% of this cost (i.e., $60k) would be approved.

Your out-of-pocket expenses will total $15,000, and you can set aside a sum of $60k in cash reserves as an emergency cushion against other costs associated with starting up a business, including marketing and advertising, permits/licenses/rent/insurance costs associated with space rental, etc.

Equipment Leasing

Equipment leasing allows you to pay the owner of the equipment regular rent for use during an agreed-upon term, with either renewal terms or buyout agreements being reached between you both upon completion of that lease term.

Leasing equipment usually entails less stringent qualifications than financing; however, if the equipment is essential to your business, its ongoing payments without an end in sight could prove more expensive than purchasing outright.

Equipment Financing Rates And Terms

As with any financing arrangement, rates and terms depend on your qualifications and current market conditions. Below are a few sample equipment financing rates and terms you should expect when shopping for equipment loans.

 
Loan to value ratio
Up to 100%
Fixed interest rates 2.00% to 20.00%
Repayment terms 1 to 25 years
Funding speed As little as 2 business days
Other requirements May have minimum credit score or operating history requirements.

Qualifying For an Equipment Loan

Loan providers vary in their requirements to obtain an equipment loan. Below are general qualifications they consider when making credit decisions; however, underwriting standards differ, and you should check each lender carefully to make sure you meet their minimum criteria.

Your personal and business credit scores are key in obtaining equipment loans. If you need more clarification on your credit standing, check online to discover your personal and business scores; higher scores mean you are more likely to receive loan approval with favorable loan terms.

Lenders often require business plans that outline your business, future growth, and credit score. This document should provide prospective lenders with a thorough summary of your enterprise; important aspects like how long it’s been in operation and annual revenues must also be included within it. Some lenders may impose threshold requirements – a minimum of two years in operation with annual revenues over $250,000.

Not only may lenders require a profit and loss statement, but they may also require a balance sheet or cash flow statement that details all revenues coming in and expenses going out – these statements help assess your business’s financial strength.

As lenders are also interested in your finances, it may be necessary to submit additional personal documents. These could include past tax returns, bank statements, and an itemized list of your debts.

Equipment Financing Pros and Cons

Here is a quick run-through of all the factors you must take into account if financing equipment for your business:

Pros Of Equipment Financing

  • Can help you build business credit
  • Can be an affordable option, especially if you opt for a secured loan
  • Can allow you to get the equipment you need for your business to grow

Cons Of Equipment Financing

  • More expensive than saving up to buy the equipment outright
  • Payments can be a hindrance to your business cash flow until the loan is paid off
  • Can seriously damage your credit or even put you out of business if you can’t make the payments

Where To Get Equipment Loans

Equipment financing options in the marketplace range from traditional bank lenders to niche online lenders.

Traditional bank lenders may require stricter underwriting requirements yet offer more competitive rates and terms, making them better suited to established businesses with strong cash flows and assets.

Specialized online lenders tend to be more accommodating regarding underwriting requirements; however, their rates and terms may differ from traditional bank lenders.

Startups or businesses with no collateral that meets the bank’s minimum credit and asset requirements may find this lender more appropriate, depending on where they stand in their journey as a business and if better rates trump faster or more flexible services.

Regarding raising money for your business, there are other means available than equipment loans. If you’re purchasing relatively affordable equipment, other forms of funding, such as business credit cards, invoice factoring, merchant cash advance, or angel investing, can offer different solutions with various terms, turnaround times, and qualification requirements that work better for you.

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