Advertiser Disclosure Find the Lowest Rates on Equipment Financing

Find the Lowest Rates on Equipment Financing

Equipment loans are an effortless way for small businesses and startups to leverage their personal and business credit; however, equipment financing may not be the right choice for all businesses. Read our guide to find what is best for you and your business needs.


Romi Levine
Romi Levine
June 3, 2022

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What Is Equipment Financing?

There are many types of business loans and financing options to buy new or old equipment. This may include machinery, vehicles, technology and more. Such types of loans are also referred to as equipment loans or equipment financing.

And like any other type of term loan, they have to be paid back with interest over a specified amount of time. Unique to equipment financing, an equipment loan or lease contract is non-cancellable and also non-transferrable. What that means is that should you want to prepay your equipment financing contract, you’ll still be responsible for the stream of payments, as there is no definitive breakdown of principal, interest, or taxes.  While this type of contract may appeal to CFOs and controllers alike due to the tax ramifications, it’s wise to consult with your own tax professional to determine if equipment financing is the optimal type of financing for your next new or used equipment purchase. 

Similar to asset-based financing the collateral of this type of loan is the equipment itself. And for these reasons it is typically easier to qualify for equipment loans than any other type of small business loan. That's why equipment loans are an effortless way for small businesses and startups to improve their cash flow position; small businesses can leverage bank money to fund their next equipment purchase and only budget for a monthly payment as opposed to a large cash outlay. 

Equipment Financing Details

Pros:

Cons:

How Does Equipment Financing Work?

Like business term loans you receive funding to purchase business equipment and pay it back with interest over a set amount of time. The amount may vary, but usually you can borrow up to 120% of the equipment value. The percent over and above 100% allows the business owner to finance “soft cost” or non-recoverable costs associated with the equipment purchase: delivery, installation, permits, etc. However, the percentage your business is allowed to finance can vary depending on the condition and type of the equipment, your personal credit and the overall business credit score as reported by Experian, Equifax, Transunion, Dun & Bradstreet (D&B).

Since equipment financing is in the family of asset-based financing, the equipment itself can be used as collateral to secure the loan. At times, certain lenders may not require all business owners to sign a personal guarantee or pledge additional collateral. However, as mentioned in the prior paragraph ownership may have to provide a 10-20% down payment. While equipment financing rates can vary from 4% to 40% depending on various factors that have been mentioned previously, rates today hover at around 10%. Keep in mind that at the time this article was written, The Federal Reserve was taking measures to curb inflation, setting off a trend of rising interest rates, regardless of type of loan or credit worthiness. If your business is contemplating onboarding a new or used piece of equipment this year, it’s advisable to check current U.S. Treasury rates, as equipment financing rates are pegged to Treasuries and are generally hundreds of basis points above a like-term security.

Repayment terms for equipment financing are normally five to seven years, lenders have the right to set their repayment terms. Lenders may change the repayment terms based on various factors including but not limited to the anticipated life of the equipment, the current secondary market value of a similar piece of equipment, or even your business’ ability to pay the loan back.

“Financing is more economical in the long run since the equipment will be yours at the end of the term”

Equipment Financing vs. Equipment Leasing

For some business owners, there may be confusion between the definition of equipment financing and equipment leasing. Having said that, that confusion can lead some small business owners to enter into an equipment loan or an equipment lease for the wrong reasons. Bear in mind that the word leasing indicates that there is no ownership, but rather just usage of said equipment over a certain term. The actual ownership of the asset is afforded to the bank or finance company and through that ownership the finance company is also afforded the depreciation tax credit. While there are more nuanced differences between equipment financing and equipment leasing, this article’s goal is to lay out the differences in any easily digestible format so that you, the small business owner, can make an educated decision on what type of small business financing makes the most sense for your business, your cash flow, your tax situation and of course, the useful life of your upcoming equipment purchase. 

With respect to equipment financing, there is no transfer of ownership of the asset at the end of the term. By definition, your business is the owner of the equipment and is afforded all rights and responsibilities as such. For example, while you do get to take the depreciation credit each tax year, should the piece of equipment break, it’s your sole responsibility to fix it. Likewise, should someone be injured while operating the piece of equipment, your business holds the financing party harmless, therefore the bank cannot be sued. Much differently, with equipment leasing, businesses have the option of purchasing the equipment for the fair market value (FMV), renewing the lease, either month-to-month or over a specified period or simply handing the collateral back to the bank or financing company. 

It is the author’s opinion that for equipment, as opposed to vehicles, equipment financing can be the more conservative approach to managing cash flow, whereas equipment leasing may make more sense for vehicle purchases due to the cost as well as the useful life of the asset.

Equipment Financing Example

As an example, let's say you needed to buy a stone saw for your stone and marble company. The purchase price of the saw is $70,000. You find a lender ready to offer you the full amount for your equipment with an interest rate of 15%. The repayment term is five years with monthly installments. So you will be paying $1666 every month for the next five years (60 payments). Given the 15% interest rate on the equipment loan, you’ll end up paying approximately $100,000 for this stone saw.-essentially $30,000 in interest. 

Now, this example may seem expensive. However, the reality is that you’re really only paying $30,000 (the interest) over five years to own this asset. Because during this time, you will be using equipment and it will generate a certain amount of profit. The profit should be able to cover the cost of the monthly installments. 

Once you’ve decided to purchase a piece of equipment, use this calculator to estimate the monthly payments. What you may realize is that given the historically low interest rate environment of today, you may be able to purchase more than you would have been able to if you had purchased with cash.

The Best Equipment Loan Lenders

There is a wide range of options to choose from since both banks and online lenders are available for equipment loans. Keeping this in mind, it may save you money to shop for the best equipment financing company and not just the best piece of equipment, as rates and fees may vary.

Here is a list of some of the best companies and some details of what they offer:

Cardiff

Cardiff offers to fund up to $250,000 with interest rates starting at around 4.99%. Their repayment term is up to six years. They are best for equipment loans ~$50,000-$150,000 and are regarded as having excellent customer service and for providing fast one of the fastest approval and funding timelines. In fact, in reviewing their Google My Business reviews, many have lauded Cardiff for their same-day financing. To qualify for a loan from Balboa you may require a "600" credit score, at least $100,000 in annual revenue and at least one year of business.

Currency Finance (formerly Currency Capital)

For startups and fast funding for larger equipment, Currency Finance is the way to go. It offers amounts up to $500,000 with a term length of up to 6 years. They require a minimum credit score of 620 and at least $120,000 annual revenue. You may receive an approval within 24 hours of submitting your application.

Crest Capital

Crest Capital is the best option for highly qualified borrowers. They offer loans up to $1,000,000 with interest rates as low as 5% with terms between 2 and 7 years. Their application process requires a minimum credit score of 650 and at least 2 years in business.

CIT (formerly Direct Capital)

CIT offers to fund upto $1,000,000 with interest rates starting at 4.99%. Their repayment term is up to six years. To qualify you need a credit score of 620. Hence it is a good option for equipment loans for startups.

CIT offers to fund upto $1,000,000 with interest rates starting at 4.99%. Their repayment term is up to six years. To qualify you need a credit score of 620. Hence it is a good option for equipment loans for startups.

eLease

eLease is best for financing for startups and businesses with bad credit. They finance $3,000 and up with repayment terms ranging between 2 to 5 years. Interest rates vary between 6% and 35%. This is an easy way for new business owners to improve their credit scores since there are no specific requirements. 

Equipment Loans For Startups

Equipment financing is a useful option for startups and small businesses. With the equipment itself serving as the collateral you don't need to meet any other requirements. Therefore, lenders like the ones mentioned above are a good option since they don't have a minimum time in the business requirement. Plus, their credit score requirements are also low. Of course, the interest rates are higher but you will have more flexibility.

How To Get Equipment Financing

  1. Find the equipment you’d like to purchase
  2. Evaluate your qualifications
  3. Complete your application and attach the following:
    1. Driver’s license
    2. Voided business check
    3. Bank statements
    4. Credit score
    5. Business tax returns
    6. Equipment quote

The Bottom Line

Equipment financing is ideal for buying business equipment. They are flexible and accessible for startups, small businesses and those with a bad credit score. However, equipment financing may not be the right choice for all businesses. Therefore, it is important to take your time to find what is best for you and your business needs.


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