How equipment financing works
Equipment financing is a type of asset-based financing, which means that the equipment itself is collateral for the loan.
You can get an equipment loan equal to up to 100% of the value of the equipment you’re looking to purchase — depending on which equipment financing company you use and your business’s qualifications. You repay the loan over time, with interest.
- Some small-business lenders may besides pay for indulgent costs, such as manner of speaking, initiation, warranties, assembly and other erstwhile expenses required to get your equipment set up and running. Certain equipment financing companies will finance these costs on top of the wide value of your equipment — offer, for example, 125 % finance — 100 % for the equipment, 25 % for soft costs .
Other equipment financing companies, however, may finance only a percentage of the cost of the equipment, say 75%, and allot the remainder of the loan (25%) to your soft costs.
Because soft costs typically require a large investment upfront when you purchase your equipment — and don’t add value to the equipment long term — it can be helpful to find an experienced equipment financing company that will finance some of these expenses. This way, you’re receiving the same interest rate to finance your soft costs as you are for the rest of your equipment loan — and you don’t have to use funds you have on hand or take out a separate loan to cover them.
Equipment financing rates and terms
Repayment terms and interest rates on equipment financing can vary depending on the equipment financing company, your business’s qualifications and how long the equipment you’re purchasing is projected to have value.
Anecdotally, equipment financing interest rates range from 4% to 30% APR.
Generally, terms on equipment loans are based on the anticipated life of the equipment or machinery you’re purchasing. A shorter term may have you scrambling to make payments, and a longer term means you’ll be paying for the equipment after you stop using it.
Equipment financing vs. equipment leasing
Lenders may offer leasing as an alternative to equipment loans. With equipment leasing, you rent the equipment from a vendor, lender or specialized equipment financing company. At the end of the lease, you return the equipment, renew the lease or buy the equipment.
On one hand, equipment leasing can help reduce costs and maximize an investment. For instance, a piece of equipment becomes less valuable and productive as it gets older, so leasing it for a limited time may be a smart move. Some financing companies also offer the option of buying the equipment at current market value.
On the other hand, equipment leasing can cost more than financing if you plan to use the equipment for a long time. According to the Equipment Leasing and Finance Association, leasing is “likely the preferable option” for equipment you plan to use for 36 months or less. If you’ll use it for longer, it makes more sense to buy.
Pros and cons of equipment financing
- low-cost. Equipment loans can provide competitive interest rates and long terms. equipment loans can provide competitive interest rates and farseeing terms. SBA 7 ( a ) loans, for exemplar, typically offer terms up to 10 years for equipment purchases. Interest rates start at 5.5 % .
You’ll own the equipment outright once the loan is repaid. If you need cash for other business purposes, you might arrange a sale-and-leaseback agreement, which involves selling the equipment to a lender in return for quick cash and then leasing it back from that lender.
You may not need to rely as heavily on personal credit, time in business or other collateral to qualify. Startups and businesses with bad credit may qualify for equipment financing.
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- Tax savings. At tax time, the At tax fourth dimension, the concern you ’ ve paid is deductible, and you may besides qualify for a disparagement tax benefit .
If the financed equipment becomes outdated, you’ll need to sell or dispose of it.
An equipment loan may require a high initial down payment.
Where to get equipment financing
Online equipment financing companies can offer access to equipment financing with more flexible qualifications than traditional bank or SBA loans. Some online lenders work with startups or businesses with bad credit.
many on-line commercial enterprise lenders besides offer streamlined lotion processes and fast finance — in some cases, financing loans within 24 hours .
Equipment loans from online equipment financing companies are typically more expensive than bank or SBA loans, however, with shorter terms and higher interest rates.
Banks and credit unions
Although banks and credit unions generally offer equipment loans with the most favorable interest rates and terms, they also have strict eligibility requirements. To qualify for equipment financing from a bank, you’ll typically need strong personal credit (a FICO score of 700 or higher), several years in business and excellent financials.
If you can meet these requirements, however, getting an equipment lend from a bank or credit union will likely be your most low-cost option. Plus, some institutions, such as Wells Fargo, have business divisions devoted to this type of finance — put up equipment solutions across a range of different industries .
As an option to traditional deposit financing, you might work with an SBA lender ( typically a bank or credit union ) to get an SBA loanword. SBA loans have retentive terms — by and large up to 10 years for equipment loans — and low interest rates. They besides allow you to use the equipment you ’ ra buy, american samoa well as equipment you already own, as collateral .
To qualify for an SBA loan, you’ll generally need a good personal credit score, 690 or higher (although some SBA lenders may have lower score requirements), and strong business finances.
Get equipment financing in your industry:
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Alternatives to equipment financing
For a look beyond equipment finance, check out NerdWallet ’ randomness list of best small-business loans. Our recommendations are based on the market setting and traverse record of lenders, the needs of clientele owners and an analysis of rates and other factors, so you can make the right finance decision .