Choosing the Best Small Business Equipment Loan

From start-ups to upgrades, equipment is essential for many businesses

Whether a business is just beginning to source equipment for the first time, upgrading equipment for improved productivity, or replacing equipment that no longer functions, equipment plays an essential role in many small businesses.

And, while these businesses can’t operate without the right equipment, they’re also balancing pandemic recovery, staffing challenges, meeting payroll, paying outstanding invoices, and a steady stream of unexpected expenses. Sound familiar?

A small business equipment loan can be a lifesaver whether it’s for a 3D printer, IT equipment, or a bobcat.

Business owner holding Open Sign. Man and woman opening their store

Equipment financing: The basics

Equipment financing is a little different from other types of small business loans. Because the equipment is generally used as collateral for the loan, the requirements to qualify may be less stringent than, say, an SBA (Small Business Administration) loan. Most lenders charge lower interest rates on equipment loans than they would for other financing options.

However, it’s helpful to know that the lender may place a lien on the equipment to protect their investment, and/or they may require a personal guarantee. If your business defaults on the loan payments, the lender may seize the equipment or call on the personal guarantee.

A great feature of equipment loans is that you’re not limited to buying new equipment. Most lenders will approve loans for used equipment. This gives you more options in sourcing equipment and can save quite a bit over the life of the equipment. Some lenders will provide 100% of the financing for the equipment, eliminating the need to come up with a cash down payment.

The term for an equipment loan will be shorter than the anticipated life of the equipment and can be as long as ten years. But if the equipment breaks down or becomes obsolete before the loan term is up, you’ll still need to pay out the balance of the loan.

As well, you may be able to get an equipment lease instead of a loan. This can be helpful for tax purposes, and in situations where you need to upgrade your equipment regularly or it requires regular repair. In the case of equipment leasing, the financer owns the equipment. At the end of the lease, you’re offered the option of purchasing the equipment.

Leasing may not require a down payment or personal guarantee. It’s also possible to be approved for a lease when you’ve been denied a loan, and may be an option for small business owners.

Pros and cons of equipment loans

There are some obvious advantages to getting an equipment loan. The first is that it allows you to purchase the equipment (or piece of equipment) that meets your business needs without having to pay in full upfront—and there are some nearly immediate tax advantages. So, it’s good for cash flow and your balance sheet.

Equipment loan applications are simpler than other business loans and the approval process is faster. And there may be tax deductions you can claim for purchasing equipment.

However, you may need to give a down payment, the lender may have a lien on the equipment, and if the equipment no longer serves your needs (or it becomes outdated/ineffective), you’ll still make monthly payments until the loan is paid in full.

There is one notable alternative to a small business equipment loan that gives you full control of your equipment without being tied to a big bank or online lender. It’s through B2B credit management and net terms solutions.

Many small businesses must offer net terms to the clients—especially for larger contracts. But then they’re left waiting 30, 60, or even 90 days for payment. Through digital net terms, the business can receive payment of up to 90% of an invoice within one day. This immediately frees up cash flow and working capital, improves account management, and empowers businesses to extend net terms to more customers and grow their businesses.

Resolve’s complete net terms management solution is transforming the landscape for small to medium businesses (SMBs) and giving them the financial solutions to do things like purchase equipment on their terms, not the big banks’.

Other alternatives to equipment loans include restaurant loans, invoice factoring, SBA loans, a business line of credit, business credit cards, inventory financing, personal loans, commercial real estate loans, and merchant cash advances.

Some loans, such as commercial real estate loans, have specific requirements. You can’t get a real estate loan if you don’t own property. Personal loans will require you to qualify on the basis of your personal assets and credit. A merchant cash advance and a business credit card will likely charge a high interest rate. Whatever you pursue, read the fine print carefully, and check out reviews of the company you’re considering applying to.

Which banks offer equipment loans?

If you’re looking for an equipment loan, a good place to start is wherever you do your banking. This may be one of the big banks or a credit union, but if you have a relationship with them, it can’t hurt to see what they offer.

Other well-known financial institutions that offer equipment financing (or have offered it in the past) include US Bank, National Bank, and Bank of America. Of course, the SBA (Small Business Administration) is also a lender who works with equipment loans. There are also alternative lenders that provide business equipment financing.

Many lenders will require the business (or business owner) to have a good FICO score or a personal credit score of 600 or higher and have been in business for at least a year—although some may accept 6 months in business.

Other requirements for loan approval may include having an up-to-date business plan, good business history, and revenue history. Expect to pay anywhere between 3 and 20% interest on the loan. This will depend on the size of the lender, your personal and/or business financials, and the amount of the loan.

What type of equipment can I finance?

It might be easier to list what types of equipment aren’t likely to be financed! First off, it’s a good idea to look at your overall business goals. Do you expect changes in the future? How will these affect your finances, your loan options, and your equipment needs?

Often, the right equipment can reduce labor costs or substantially save in other expenses such as utilities. For example, a manufacturing facility may see savings in purchasing equipment that runs on renewable energy instead of fossil fuels.

The life of the equipment is an important factor as well. How long will it work? Will technology make it obsolete in five years? Are there high maintenance costs?

Once you’ve established how the new equipment will impact your business, you’re ready to proceed.

Two industries that often access equipment financing are manufacturers and restaurants. Manufacturers will finance equipment like trailers, production line machinery, forklifts, and excavators. Restaurants finance everything needed to run a restaurant from pots and serving ware to refrigerators and deep fryers.

Other businesses that frequently need to finance equipment include medical and dental practices, sporting facilities and gyms, and offices. They may finance everything from computers and software to office furniture, phone systems, and safety equipment.

And, while new businesses may have many more items to purchase, all businesses need to replace aging equipment, add equipment as the business expands and develops, and take advantage of new technology that improves operations.

Tips for making the best equipment purchase

As we’ve mentioned, assessing where your business is at right now is an important step in preparing to purchase equipment. Then, look at your goals. Do you need to increase productivity? How do your short-term and long-term plans reflect this? Will an upgrade or buying used work instead of buying new equipment?

If you’re new to purchasing equipment, or you’ll be investing a large amount of money in equipment, consider bringing in some outside advice. An expert who can provide a cost-benefit analysis may help determine the best choices for equipment—and help avoid unnecessary purchases, or those that won’t pay for themselves in the long run.

Advancements in technologies are spurring many businesses to upgrade equipment. These advancements tend to show significant cost-savings in real-time production monitoring, quality control, predictive maintenance, increased automation (which also leads to lower labor costs), and even faster prototyping which is accelerating time to market.

With all this in mind, creating a technology roadmap for your business will provide a cohesive strategy for converting equipment or changing production to accommodate new equipment over time.

As if all the emerging technology wasn’t enough of a change, you may also find a massive variety in products, costs, and features through online shopping. While this is often a great opportunity to save, consider what the supplier offers for servicing, and their overall reputation.

Of course, new and different equipment will mean investing time, money, and resources in training your employees. It’s typical to see a drop in productivity for a short time while employees get up to speed with new equipment, but if they aren’t trained adequately, you may never experience all the benefits of the equipment. Set aside time for training, and make sure your deliverables are prepared for a temporary slowing in production time.

Another cost to keep in mind is the transportation and installation of equipment. Make sure that quotes from suppliers indicate if this is included and add in any local costs you’ll have once the equipment is delivered. Most financial institutions and lenders will include these costs in your equipment loan if you request it.

As we’ve mentioned earlier, using the purchase of new equipment as an opportunity to save money on utilities is a sound practice both financially and environmentally. Factor in cost savings on energy efficient equipment in your cost-benefit analysis. Energy savings may come with government rebates or incentives. Suppliers may have information on this, or your local utility company. And of course, always choose environmentally responsible options for disposing any outdated equipment.

businessman sitting in a warehouse office looking at laptop and writing notes

Step-by-step preparation for applying for an equipment loan

While applying for an equipment loan is generally a quicker and easier process than applying for other loans (such as a start-up loan), there are still some important steps to take in advance so you’re ready for the application process and approval.

First, check your personal credit score and your business’ credit rating. Use one of the free online tools to check your credit reports. Bad credit and credit history will impact your equipment financing options. If there are any errors or old information, make sure to contact the credit reporting agency (either TransUnion, Equifax, or Experian) and have these corrected. This could include everything from updating your address to having credit reporting errors removed.

Next, update your business plan. If you already prepared one at the start of your business, now is a good time to review everything and add in current details. Include descriptions of products and services, annual revenue, your current cash flow system, your target market, business projections, annual reviews, and a clear Executive Summary.

As the business owner, you’re considered a borrower and are part of the contributing factor for loan approval. It’s a good idea to have an up-to-date resume that shows your experience, skills, and education and gives the lender confidence that the business is in good hands.

Get your personal and business financial statements in order so you can show that you’re organized, your business is performing well, you have your finances well under control, and you can make the monthly payments for the loan amount you're applying for. Lenders will look for professionally prepared cash flow statements that support your financial claims.

In many cases, you’ll need to provide a down payment to be approved for an equipment loan. This may be up to 20% of the entire purchase price. If this is the case, you’ll need proof that you have the down payment ready.

For 2021, the Section 179 tax deduction for equipment purchases includes the chance to claim 100% depreciation in the current year (limits apply). This means that you may be able to lower your business's taxable income on paper and lower your taxes while spreading out the cost of the equipment over years through loan payments.

Net terms & credit management

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