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aving the right equipment can help you run your business smoothly and stay on task to meet goals. Unfortunately, commercial equipment can be costly – you may not always have the necessary cash on hand to purchase equipment outright.
Financing equipment purchases can help your business stay competitive without tying up all of your resources. Banks and other lenders offer equipment loans that can cover up to 100% of the purchase price. Here's a deeper look into equipment financing to determine if it fits your business needs.
What is equipment financing?
Equipment financing is a type of loan offered by banks and other lending companies that enables small businesses to purchase or lease equipment or machinery necessary for business operations.
Businesses rely on equipment every day to perform tasks, produce goods, and create a more efficient and profitable environment. Access to the right equipment can often mean the difference between being a profitable company and one that's struggling to compete.
What types of equipment can you finance? Almost any type of equipment or machinery can be financed through an equipment loan, including, but not limited to:
- Heavy machinery
- Farm equipment
- Construction equipment
- Restaurant equipment
- Medical equipment
- Tools
- Computers
- Printers
- Copiers
- Photographic equipment
- Office equipment
- Audio equipment
- Software
- Hardware
- Vehicles
- Furniture
There are different types of equipment financing available depending on the lender and your needs.
How does equipment financing work?
Equipment financing helps fund the purchase or lease of new or used equipment. It's a type of asset-based lending in which the purchased equipment acts as collateral to secure the loan. When the loan is paid in full, ownership of the equipment becomes 100% yours. If you default on the loan, the lender can repossess the equipment.
As mentioned, many lenders allow you to finance up to 100% of the equipment cost. The loan may also cover the cost of delivery, installation, taxes, fees, and any other expenses related to the purchase. Many lenders, however, require you to put down a down payment on the equipment of up to 15% or higher, depending on the cost and other factors. Sometimes, a lender may require you to put up other business or personal assets as collateral to secure financing.
Like other types of lending, you will pay back the equipment loan over time, paying interest on top of the principal payment. Interest rates vary between lenders based on factors such as your business' credit rating, how long you've been in business, the company's annual revenue, and the terms of the loan. Lenders may offer a range of lending terms, but often they line up with the usable life of the equipment you wish to purchase.
What are the benefits of equipment financing?
Like other forms of financing, equipment financing can help you purchase something you may not be able to afford outright. There are several other benefits for businesses to consider with equipment financing:
- You’ll pay a lower initial expense
- Helps preserve your business's cash flow
- Can help you afford purchases that weren't in your budget
- Builds your business credit
- Makes equipment purchases more affordable
- Allows you to purchase equipment that will help your business grow
- Often doesn't require additional collateral beyond the equipment itself
- Interest paid on your equipment loan may be tax deductible
- Can often finance up to 100% or more of the equipment purchase
Equipment loaning vs. equipment leasing
There are two primary types of financing for business equipment — loans for equipment purchases and equipment leasing. Here’s an overview of each:
Equipment loans
Equipment loans are fixed-rate loans for a specified term. Lenders use the equipment as collateral and can repossess it if you fail to repay your loan. Many lenders require a down payment to secure the loan, and you may need to provide additional collateral.
Once the loan is paid off, you own the equipment. Unfortunately, that also means that your equipment can depreciate as it gets older and becomes obsolete. There's no guarantee that your equipment will outlast your loan term.
Equipment leasing
Leasing equipment can often be a more economical solution to obtaining necessary equipment. Equipment leases typically don't require a down payment, which isn't always the case with an equipment loan.
One of the biggest downsides of equipment is its life cycle. Equipment can go from being progressive to obsolete quickly. Leasing equipment reduces the risk of obsolescence. With leasing, you can upgrade to newer equipment.
How to qualify for equipment financing
Requirements to qualify for equipment financing vary between lenders. Banks and other lenders use several factors to determine eligibility for loans. In most cases, established businesses with a favorable credit and financing history are more likely to qualify for financing, lower interest rates, and better terms.
Factors that lenders consider when determining eligibility may include:
- Industry
- Length of time in business
- Annual business revenue
- Business credit profile
- Personal credit score and history
Some industries, like construction, are considered riskier than others and may require a larger down payment to secure financing. Less risky businesses may qualify for a smaller down payment or better rates and terms.
Startups may qualify for an equipment loan, although it might be more challenging since startups typically haven't been in business very long. If you run a startup, you may need to provide a larger down payment or prove you have sufficient cash flow.
Some lenders may require you to provide a business plan detailing your business structure and plans for growth. Other documentation you may need when applying for equipment financing includes a profit and loss statement, balance sheet, and cash flow statement. All of these documents provide a clearer financial picture of your business.
Novo Platform Inc. strives to provide accurate information but cannot guarantee that this content is correct, complete, or up-to-date. This page is for informational purposes only and is not financial or legal advice nor an endorsement of any third-party products or services. All products and services are presented without warranty. Novo Platform Inc. does not provide any financial or legal advice, and you should consult your own financial, legal, or tax advisors.
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