What's an Equipment Loan?
There are numerous reasons for needing an equipment loan:
- Your business needs to purchase a new piece of equipment
- You’re replacing old equipment or machinery
- You have expensive repairs on your current piece of equipment
- You’re upgrading your equipment to a newer model
If you, as the business owner, find yourself in one of these scenarios, then considering an equipment loan could help you fund such purchases. Equipment loans are loans to buy equipment for your business to allow it to run at maximum efficiency and productivity.
In the situation of buying new equipment, you do have the option of leasing or obtaining an equipment loan
Should You Lease or Loan?
Leasing is worth the consideration for a business that doesn’t have available credit. This option for new equipment doesn’t typically require a company to put forth a down payment. If there’s a down payment that is required, it’s small in comparison to that of a traditional loan’s down payment.
With leasing, you can expect to finance around 100% of the cost of the equipment. There are soft costs to consider. Soft costs included taxes and delivery charges, and add up to be around 20-25%.
It’s like leasing a car
. By the conclusion of the lease, you have the choice of purchasing the piece of equipment for a small amount that’s leftover on your principal, paying for it in full, or you can return it. The benefit with leasing is that if a business doesn’t need the equipment for a long period of time or would prefer a greater amount of flexibility, this allows them that option.
Alternatively, you could opt for an equipment loan. An equipment loan allows a business to finance about 80% of the total purchase price of the equipment. Unlike a lease, an equipment loan permits you ownership over the piece of equipment from day one.
However, there will be a down payment. You can expect to place a down payment with your loan for your equipment of a bout 20%, which is generally required for small business equipment loans. The lender then uses the equipment you’re purchasing as collateral in the scenarios of missed or late payments or if you default on your loan. They can seize the equipment and liquidate it to make up for their losses.
How to Get an Equipment Loan
If there’s one thing you need for an equipment loan application process, it’s an impressive portfolio of upstanding credit. Excellent credit is often needed for an equipment loan, at least to obtain a loan through trusted lenders that offer attractive rates.
While the equipment itself acts as collateral for this asset-backed lending solution, lenders still have high lending standards for equipment loans. For some small business, especially those just starting out and are beginning to acquire their equipment, this can be a challenging task.
The size of the loan should equate to the price of the equipment you plan on purchasing. Your should also try to match your loan’s term to how long you plan on using your new equipment. If you’re buying an order picker that you plan on using for approximately five years, then you should get a five-year loan. If you opt for a shorter loan period, then you could find yourself scrambling to make payments on it. A longer loan period could mean you’re paying for your equipment long after you’re finished using it.
Does Your Business Need an Equipment Loan?
It can be difficult to say as to whether or not your business really needs an equipment loan. There’s no general answer as all industries are different, but there are a few questions you can ask yourself to help guide you in determining if this lending option is right for your business:
- You know you’ll need the piece of new equipment even after the loan is paid off, making it a worthy investment
- Your business needs relatively quick approval to lock down a new piece of equipment
- You want to take advantage of a possible tax deduction with an equipment loan, marking your monthly payments as an operating expense
- Your business could use the funds you’ll save with an equipment loan on other expenses, establishing a reliable cash flow that won’t detriment your business’ capital
- Your company can manage the down payment typically required for an equipment loan - about 20%
The main worry is that piece of equipment will become obsolete to the company once the loan is paid off, rending the equipment useless and the company having spent interest and fees on something they didn’t end up needing. Of course, should this occur, a company can always sell the equipment, but is faced with the hassle and depreciated value, losing money, time, and effort in the process.
An equipment loan, when applicable for a business that has the cash for a down payment and long-term plans for the equipment they’re buying, is often an excellent way to fund a big purchase. This type of lending solution usually has the lowest interest rate. Another added bonus is that your company will own the piece of equipment from the start of the loan with the interest you’ve paid as tax deductible (and often times, there’s a depreciation tax benefit).
Businesses unsure about owning a new piece of equipment that they may not need in a few years can entertain the idea of leasing, as previously discussed. This financing alternative can reduce costs, too, and maximize your investment, which is especially true in situations of equipment becoming less productive over its use.
Yes, leasing is ultimately more expensive than an equipment loan, but it’s the price a business pays when they are uncertain about a pricey piece of machinery or equipment.
Equipment Loans: The Bottom Line
As one of the better lending options available to small businesses on the market, equipment loans can be a smart tool companies can utilize to ensure stability in cash flow while making such a big commitment. Equipment loans, even derived from traditional banks and financial institutions, often have favorable interest rates and terms, allowing flexibility for the borrower.
Other alternative forms of financing can hinder cash flow and are not as lucrative in obtaining new equipment in contrast to an equipment loan, even leasing. These loans are straightforward, and if you get an equipment loan from a trusted, reputable lender, your business should acquire a loan with a relatively low interest rate. All of this while managing its efficiency and productivity with a new piece of equipment.