Understanding Equipment Loans
Funding for the acquisition of machinery and other essential hardware is known as an equipment loan. In order to process, manufacture, or update their product, businesses often need to buy, replace, repair, or upgrade numerous types of equipment. Items that fall under the umbrella of “equipment” include but are not limited to: computers, monitors, printers, copiers, phones, furniture, tools, vehicles (for business usage), specialized machinery, industrial equipment, and medical and dental devices. You can’t operate your firm at peak efficiency and output without these various pieces of equipment. However, what do you do when your tools have seen better days and need to be replaced because of age or wear and tear? Usually, you may either buy brand-new gadgets outright or sign a lease.
How Equipment Financing And Equipment Loans Work
Do not only bring your company’s credit history to meetings with lenders; bring your own as well. Got credit card debt? Some overdue car loan repayments? Not paying back your student loans? The approval of a loan for equipment will be delayed or perhaps halted if these types of problems arise. Small company financing criteria may include proof of excellent credit. Work aggressively to clean up your credit. Also make sure that you present your business’s cash flow statements to detail the money coming in and going out.
Standard lenders, such as banks, are hesitant to provide small businesses with low or negative credit with traditional equipment loans. Such companies will have a hard time getting a loan from a conventional bank since they are considered “too risky.” Many owners of small or internet businesses struggle with this issue, since they often need funds to upgrade or replace aging machinery. A business loan might be helpful in this situation. If you need cash quickly so that you can keep your firm running, a business loan may be the answer.
Most equipment loans need a high credit score. After all, it’s a wager on the future success and financial gain of your company. The bank with whom you conduct the most business is a good candidate to receive your loan application. Alternately, you may look into a non-bank financial institution, such as an internet lender, that helps entrepreneurs with limited time and resources get quick loans to expand their businesses.
Five Benefits Of Equipment Financing
In most cases, equipment loans are granted (or rejected) quickly. Consider applying for your small business line of credit with a nontraditional lender to expedite the process. An online lender that provides speedy funding for a variety of objectives including inventory, equipment improvements, and marketing initiatives will work well. Online lenders usually get back to you within hours. That means you’ll have the extra cash you need sooner, allowing you to buy or replace the equipment you need.
You may be eligible to deduct your monthly payments on an equipment loan as an “operating expense.” To be sure, check with your lender and a company tax attorney.
You’ll have more money in your pocket
Maintain a cash reserve for additional purchases that may be required to manage your business. Assume one of your delivery vehicles fails and must be replaced. Or maybe your restaurant’s oven is broken. Rather than depleting your company’s cash reserves to pay for these high-ticket goods, equipment loans may be utilized to replace or repair this costly – and critical – piece of equipment.
Flexible Payment Schedule
Depending on the lender from whom you get your business equipment loans, you may be able to use flexible payment options. This is useful while you strive to replace the equipment, manage your firm, and make payments on your business equipment loans. Depending on the sort of loan you get, some lenders may give you the choice of making monthly, seasonal, quarterly, biannual, or even yearly payments. You may also be eligible for a 90-day delay on repayment of your equipment loan. Again, engage with your lender on equipment loans to determine what is best for your company’s requirements.
Around 25% of “Soft Costs” are covered
Fees, delivery charges, and freight charges are examples of soft expenses. Again, each lender is unique, so do your homework to understand precisely what fees are relevant to the loan and which fees you will be liable for paying.
Rates And Terms
Loans for purchasing equipment or other hardware usually have a set term, usually between one and five years, however this may vary depending on the lender. The monthly payments on an equipment loan include the principle and the interest, which may reach 28% in extreme situations. Paying a portion of the loan amount up front is a standard practice at several financial institutions and may help you save money throughout the life of the loan.
Where To Get Equipment Financing
When it comes to financing company equipment, you have numerous choices.
Non-traditional lenders, such as those found online, use a simplified procedure to evaluate your company’s income, assets, and overall creditworthiness. As a result, they may have more accommodating lending policies, larger loan amounts, and quicker financing timelines. Yet, they often have more expensive interest rates and shorter repayment periods.
Standard lending organizations like banks and credit unions often have more stringent loan requirements yet provide equipment loans at competitive rates. You’ll need, among other things, an excellent credit history, evidence of continuous operation, and a sizable yearly income, to name a few.
Alternative funding sources include the U.S. Small Business Administration (SBA). Extended repayment periods and interest rate caps are two distinguishing features of Small Business Administration (SBA) loans. As an added bonus, you may use both your current and future hardware as security for the loan. However, a high credit score and consistent income are usually prerequisites for approval.
Equipment Financing Vs. Leasing
Keep in mind that leasing is another option to explore if you are shopping around for a loan for company equipment. To help you decide whether to lease or finance your next piece of machinery, we’ve compiled some pros and cons.
Leasing Equipment The benefits here are magnified for firms who are strapped for cash. If a down payment is needed at all, it is often far less than the down payment on a conventional loan.
Leasing allows you to spread the expense over a longer period of time and cover all or almost all of the purchase price, plus 20% to 25% for “soft charges.” Taxes and shipping fees are examples of soft charges.
Your small or internet business will have more options when you lease rather than buy. When the loan’s principle is paid in full, you may either return the item or buy it from the lender for a nominal amount.
Although the exact percentage you are able to borrow depends on your credit history and the lending institution you choose, loans typically cover 80 percent of the item’s price. If you want to get a loan in order to purchase your machinery, you will own it immediately. Most loans for small business equipment need a down payment of around 20%. The equipment you buy with your loan serves as security for the loan.
How To Qualify For Equipment Financing
To qualify for equipment financing, lenders will look at a number of criteria including:
- Personal Credit Score: Your personal credit score will be examined to determine your eligibility for the loan. Many online lenders have minimum credit scores ranging in the 600 area.
- Time in Business: Some lenders will require that your business should have been in operation for at least two years, but some online lenders allow the operational time to be six months or less. Some do not even have a minimum time in business requirement.
- Annual Revenue: Traditional banks may require a minimum annual revenue amount, for example Bank of America requires $250,000.