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 type of loans are also referred to as equipment loans.
And like any other type of loan, they have to be paid back with interest over a specified amount of time.
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 credit scores.
Equipment Financing Details
- Quick funding for equipment purchases
- The equipment itself serves as collateral on the loan
- Easier to qualify for than other business loans
- Affordable interest rates
- Limited paperwork and fast application process
- Equipment could be obsolete by the time the loan is fully repaid
- May require a down payment
- Only applicable to businesses that need to purchase equipment
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 100% of the equipment value. However, it depends on the condition and type of the equipment, your qualifications as a business and who the lender is.
Since this is a type of asset-based financing the equipment itself can be used as collateral to secure the loan. Which means you won't have to sign a personal guarantee or additional collateral. However, you may have to provide a 10-20% down payment. Equipment financing rate can range from 4% to 40% depending on various factors that have been mentioned previously.
Repayment terms for equipment financing are normally five to six years. But lenders have the right to set their repayment periods. Lenders may change the repayment terms based on various factors including but not limited to the anticipated life of the equipment, your ability to pay the loan back and more.
Equipment Financing Vs Equipment Leasing
There is a general confusion between equipment financing and equipment leasing. So, we have explained the difference to help you decide which is better for your business. While there are more nuanced differences, we have tried to discuss the distinctive differences in an easy-to-understand way.
With equipment financing at the end of the repayment term the ownership of the equipment is with you as the borrower and not the lender. Whereas with equipment leasing you have the option of purchasing the equipment or renewing the lease similar to leasing a car.
Financing is more economical in the long run since the equipment will be yours at the end of the term.
Equipment Financing Example
As an example, let's say you need to buy new computers for your software house. And the cost comes up to around $7000. You find a lender ready to offer you the full amount for your equipment with an interest rate of 14%. The repayment term is 2 years with monthly installments. So you will be paying $333.37 every month for 2 years. This totals to approximately $8000; out of which, the interest is equal to $1000.
Now this may seem expensive. But the actual cost of the equipment is $1000 (the interest). 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.
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, you may want some help with finding the best equipment financing companies.
Here is a list of some of the best companies and some details of what they offer:
- Balboa Capital
Balboa Capital offers to fund up to $250,000 with interest rates starting at around 10%. Their repayment term is up to five years. They are best for larger funding and providing fast loans. Sometimes as fast as the same day. To qualify for a loan from Balboa you need a "decent" 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. And 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.
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. And interest rates 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
- Find the equipment you’d like to purchase
- Evaluate your qualifications
- Complete your application and attach the following:
- Driver’s license
- Voided business check
- Bank statements
- Credit score
- Business tax returns
- 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.