How to get an equipment loan
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An equipment loan is a small business loan you can use to help fund equipment for a business. Small business equipment loans work similarly to any other business loan, and they are offered by many types of lenders. You can use the loan to buy, repair or replace equipment.
Business equipment is any tangible asset that you use for your business. This includes company vehicles, machinery, computers and furniture. If you need help financing equipment for your business, follow these steps to get an equipment loan.
1. Know what kind of equipment you want
When you apply for the loan, the lender will want to know what equipment you plan to buy. This helps them understand the loan amount. It also gives them information on the specific equipment that will act as collateral for your loan.
Before you sign up for the loan, make sure you understand the full loan amount and the monthly payments. Use a business loan calculator to get an idea of monthly payment amounts. It’s important to make sure you can afford the loan before getting it.
2. Decide between an equipment loan and an equipment lease
There are two main options for financing business equipment: a loan or a lease. An equipment loan often requires a 10 to 20 percent down payment and allows you to own the equipment as soon as the purchase is made.
On the other hand, equipment leasing doesn’t usually require a down payment. But you don’t own the equipment unless you opt to purchase it at the end of your lease. Think of equipment leasing as long-term renting.
Here are the key differences:
|Equipment loan||Equipment lease|
|Your business owns the equipment as soon as the purchase is made||You don’t own the equipment until the equipment is paid off and you agree to buy it fully. You also have the option to return the equipment at the end of the lease period.|
|Down payment often required||No down payment required|
|Loan terms can be up to 10 years||Typically come with a shorter term than a loan|
Equipment leases are a great option if the business equipment you need becomes obsolete quickly. You don’t have to worry about getting rid of outdated equipment. You can simply end your lease.
Equipment loans are a better option if you want to own the equipment and you have the money for the down payment on the equipment.
3. Assess your qualifications
Typically, lenders will look at the length of time you’ve been in business, your business credit score and business revenue to decide if you qualify. You can usually expect lenders to look for these qualifications in businesses:
- Length of time in business: Usually, at least 2 years (though some work with startups)
- Personal credit score: Minimum 560
- Annual revenue: At least $50,000 per year
4. Seek lenders that match your qualifications and needs
Both traditional lenders — like banks and credit unions — and online lenders offer equipment loans. There are even lenders that specialize in equipment loans, such as TAB Bank and Triton Capital.
Research several options and look for lenders that best fits your needs. Some lenders may specialize in construction equipment loans, for example. Other lenders may work specifically with new businesses.
5. Compare lenders and loans
Once you’ve found some lenders with loan options you likely qualify for, compare your options. The right lender may differ for each business.
Compare the pros and cons of several types of lenders, including both traditional lenders and online lenders. Then, consider which loan option and lender will serve your needs best. If a lender provides an option for prequalification, take advantage and see what kind of rates you qualify for.
Take in the full picture of the loan costs and how loan management works. Think about interest rates, loan fees, down payment amount required and if the loan has any prepayment penalties.
6. Gather documents and apply
When you are ready to apply, take your time to prepare your loan application and the required documents. You will typically need to provide documents that provide business financial information and prove your business exists, like these:
- Business license and registration
- Business plan
- Business bank statements from the past year
- Business tax returns from the past three years
- Current financial statements, such as accounts receivable, balance sheet and income statement
Understand the specific requirements of your lender to help you gather exactly what you need.
The bottom line
Getting an equipment loan is an exciting step in building your business. While finding a loan and going through the loan application process can be tedious, it will be well worth it if it helps your business move forward.
Do your research and follow these steps as you pursue a business equipment loan.