Whether you're a startup or an established business, having the right tools can be essential for staying ahead of the competition.
The problem? Among the many costs of starting a business, acquiring the latest high-tech machinery or upgrading old equipment may be too expensive for the average entrepreneur.
That's where business equipment financing comes in. In this guide, we’ll break down what equipment financing is, how it can work, and the potential pros and cons of equipment loans.
Also called equipment loans, business equipment financing is a type of business loan for machinery, technology, vehicles, or other tangible assets necessary for operating a business. Equipment loans may help businesses preserve their working capital while spreading the cost of equipment over time.
Instead of paying the full cost of the equipment upfront, businesses can apply for a loan to cover the expenses — whether they’re a restaurant in need of a new commercial dishwasher, a cleaning company shopping for a reliable van, or a medical office looking to replace a broken ultrasound machine.
It may be especially beneficial for startups and small businesses, as it can help them overcome budget constraints and obtain the tools they need to operate efficiently and stay competitive.
Are equipment loans and traditional business loans the same? Not exactly. Equipment loans are a type of business loan. However traditional business loans can be used for a wide range of purposes, including equipment purchases but also other expenses like inventory, payroll, or marketing.
Businesses can seek equipment financing from a variety of sources, including banks, credit unions, online lenders, equipment manufacturers, or specialized equipment financing companies.
Business equipment financing loans generally require a down payment, which may vary depending on the lender. When it comes time for repayment, businesses typically have the option to make regular payment installments over an agreed-upon term, which can range from months to several years.
The loan may likely accrue interest based on an agreed-upon rate. The interest can be fixed or variable, depending on the loan terms. The lender may charge additional fees, such as origination fees and documentation fees.
Normally, the tools purchased with an equipment loan may serve as collateral until the loan is repaid. If a business fails to repay a loan, the lender may have the right to seize the asset to recover the losses. Equipment loans may also require a personal guarantee, making a business owner personally liable if the business defaults on the loan.
Depending on the industry, many different types of equipment may be purchased through an equipment loan.
Here are some common examples:
Check with a lender or financial advisor to determine eligible equipment for financing.
There are several potential upsides to equipment loans for small businesses, such as:
Potential disadvantages of equipment loans may include the following:
Ready to apply for equipment financing? Here are some general steps small businesses can follow when applying for business equipment financing:
Remember that these steps provide a general framework, and the specific process may vary depending on the lender.
Deciding between equipment loans for new business or an equipment lease?
Equipment financing generally involves obtaining a loan to purchase equipment, with the business eventually owning the equipment once the loan is fully repaid. On the other hand, equipment leasing can allow businesses to use the equipment for a predetermined period by making regular lease payments.
While equipment financing can offer ownership and long-term investment, equipment leasing may provide flexibility, lower initial expenses, and the ability to access updated equipment. The choice between equipment financing and leasing can depend on factors such as business needs, budget, desired ownership, and equipment lifecycle.
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