What is an equipment loan and how does it work?
Key takeaways
- A business equipment loan is designed specifically for buying equipment and is secured by the equipment itself
- Equipment loans can't be used for any other business need
- Equipment leasing is another option, which could have lower upfront costs than a loan
Whether your company needs a copier machine, restaurant equipment or a semi truck, you may be able to save capital and get the equipment you need with an equipment loan.
Offered by banks and online lenders, the best equipment financing can help business owners buy equipment to start or grow a business or repair or upgrade old equipment to remain competitive.
Equipment loans tend to lower eligibility requirements compared to other loans. But while these loans are accessible, they’re not the only option available for buying equipment. Explore the ins and outs of getting an equipment loan, how they work and whether they’re the best option for your business.
What is an equipment loan?
An equipment loan is financing you take out to buy a specific piece of business equipment.
And in this case, equipment can be pretty broad. Companies take out equipment loans to finance the purchase of:
- Computers
- Office furniture
- Vehicles for commercial use
- Machinery
- Commercial kitchen equipment
- HVAC units
- Phone systems
- Printers and copiers
- Medical equipment
- Industrial equipment
In other words, if your company needs to make a big purchase of a tangible asset, an equipment loan can help you break it into manageable payments that you make over time.
How does equipment financing work?
Business equipment financing works by using the equipment you’re buying to secure the loan. The equipment becomes collateral, meaning the lender can seize the asset if you fail to repay what you borrow. You may also have to provide a personal guarantee, which requires you to be personally responsible for the loan if your business can’t pay the loan back. This puts your personal assets at risk.
Equipment financing usually comes with a fixed interest rate and a requirement that you make periodic payments to repay the loan. Usually, the loan term falls somewhere between three and 10 years.
Many equipment loan options require a down payment, anywhere from 10 percent to 20 percent, depending on the lender. The more money you can offer as a down payment, the more favorable the interest rates tend to be.
While these features are true of equipment loans generally, you can finance equipment in several ways, including equipment leases or SBA 504 loans. The exact type of equipment financing you choose will determine the features included in the loan. For example, an equipment line of credit will approve you for a set amount and allow you to withdraw the amount you need to buy or repair equipment.
Equipment loan vs. equipment leasing
Equipment leasing typically doesn’t require a down payment, making it a better option for business owners who can’t afford to tie up funds to purchase equipment. Another advantage to leasing is that it can protect you from depreciation or obsolescence. If you’re buying something that won’t be worth much — or even functioning or relevant — by the time your loan term ends, owning the asset doesn’t go very far. With little-to-no resale value, leasing it might make more sense for your business.
Equipment loan eligibility requirements
As with any financing, banks, credit unions and equipment financing companies vet you before offering you the loan. That means they will look at several factors and require financial documents, including:
- Your business credit score
- Your personal credit score
- How long you’ve been in business (you usually need to have existed for at least a year to get approved)
- Your business’s profit and loss statement
- The value of the equipment you want to purchase
It’s possible to find lenders willing to work with business owners with bad credit and limited time in business. But the more favorable those factors look to the lender, the better the interest rate you’ll score on your equipment loan.
That interest isn’t the only potential cost to evaluate. Some equipment financing comes with loan fees, like origination fees, late fees, or prepayment penalties, so be sure to read the fine print to know what you’ll potentially pay.
Bottom line
A business equipment loan can enable your business to buy even expensive tangible assets that will help it thrive. Since the equipment acts as collateral, this loan can be an accessible option for startups and bad credit borrowers.
To make sure you find the best deal, evaluate options from at least a few equipment lenders before you sign on the dotted line. If an equipment loan isn’t right for you, you can look into other business loan alternatives to help you get the financing you need.
Frequently asked questions
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Usually, these loans must be repaid between three and 10 years. The interest rate varies depending on your business’s unique qualifying factors, like time in business and credit score.
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Generally, you’ll need a personal credit score of 575 or more. That said, a credit score is just one factor lenders consider. A bigger down payment, more time in business, other collateral and solid annual revenue at your company can all help to make up for poor credit.
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Generally, getting an equipment loan is easier than other types of small business loans. This is thanks, in part, to the fact that the equipment serves as its own collateral for the loan.