How to apply for business equipment financing

What is business equipment financing?

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.

How does equipment financing work?

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.

Types of equipment that can be financed

Depending on the industry, many different types of equipment may be purchased through an equipment loan.

Here are some common examples:

• Restaurant: Commercial kitchen appliances, refrigeration units, ovens, and restaurant furniture.
• Technology: Computers, smartphones, servers, networking equipment, software, and other technology-related assets.
• Transportation: Trucks, vans, trailers, delivery vehicles, and specialized transportation equipment.
• Construction: Tractors, excavators, bulldozers, cranes, and loaders.
• Manufacturing: Assembly line equipment, compressors, package machinery, and 3D printers.
• Medical: Medical devices, diagnostic equipment, imaging machines, and other healthcare technology.

Check with a lender or financial advisor to determine eligible equipment for financing.

Potential pros of equipment loans for small businesses

There are several potential upsides to equipment loans for small businesses, such as:

• Cash flow management: Businesses can spread the cost of the equipment over time, freeing up cash for other operational needs, such as inventory, marketing, or hiring.
• Access to the latest technology: Upgrading or adding new equipment can lead to improved operational capabilities, increased output, and potential cost savings.
• Building credit: Making payments on time may help improve a business’s credit score.

Potential cons of equipment loans for small business

Potential disadvantages of equipment loans may include the following:

• Down payment requirements: Many equipment loans require businesses to make a down payment, which may cost anywhere from 10 to 20% of the total loan amount.
• Interest and fees: Equipment loans typically include interest charges and fees, which can increase the overall cost of financing.
• Collateral and personal guarantees: Since the equipment itself generally serves as collateral for the loan, there may be a risk of losing the equipment if the business defaults on payments. Also, some lenders may require a personal guarantee from business owners, holding them personally liable for the loan.
• Depreciation: As the loan is being repaid, the equipment's value may decline, potentially leading to a situation where the outstanding loan balance exceeds the equipment's current worth.

Applying for business equipment loans

Ready to apply for equipment financing? Here are some general steps small businesses can follow when applying for business equipment financing:

• Assess your needs: Determine the specific equipment required for your business operations and identify the estimated cost.
• Research and compare lenders: Explore different lenders. Compare their interest rates, terms, eligibility criteria, and customer reviews to find the best fit.
• Gather necessary financial documents: This may include business financial statements, tax returns, bank statements, and any other documents that lenders may require to assess creditworthiness.
• Complete the loan application and wait for approval: Fill out the loan application. Provide information about your business, equipment details, and the loan amount you are seeking.
• Review loan terms: If approved, review the loan offer provided by the lender. Pay attention to the loan amount, interest rate, repayment term, fees, and any other conditions or requirements associated with the loan.
• Acquire equipment: Once accepted, use the approved loan funds to purchase the equipment from an approved vendor or supplier. Ensure compliance with any guidelines or specifications set by the lender.
• Begin repayment: Start making regular loan payments as outlined in the loan agreement. Track the repayment schedule, set up a payment system, and ensure on-time payments.

Remember that these steps provide a general framework, and the specific process may vary depending on the lender.

Equipment financing loan vs. equipment lease

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.

If you’re looking for small business loan tips, learn more about applying for a small business loan.