Equipment Financing

Whether or not a business equipment loan requires a down payment depends on the lender and the exact type of financing being used to pay for the equipment. In traditional forms of equipment financing, where the equipment is used as a form of security, a down payment of 10 - 20% is fairly common.

Term lengths and interest rates for equipment loans vary by individual lender, based on your credit profile and the amount borrowed. Commercial loan repayment terms tend to max out at seven years.

While loan terms will differ, most traditional lenders will ask for a down payment upfront — typically 20% of the loan amount. An SBA 504 loan will require a 10% down payment. As with most loan options, the interest on an equipment loan may be tax deductible; you should consult a tax advisor regarding your specific situation.

The credit score required for equipment financing varies depending on the lender, loan type and your business’s financial health. However, here’s a general breakdown of what you may need for credit approval:

Minimum Credit Score Requirements

600+. Some lenders offer equipment financing to qualifying borrowers with credit scores in the low 600s, though terms may not be as favorable.

650 - 700. A good range for securing financing with competitive rates from banks and traditional lenders.

700+. Typically qualifies for the best interest rates and terms, especially from well-established banks and lenders.

Other Factors Lenders May Consider

Even if your personal credit score is on the lower side, lenders may also look at business credit and other factors:

Business revenue and cash flow. Strong revenue can offset a lower credit score.

Time in business. A business operating for 2+ years is often preferred.

Down payment. A larger down payment (10 - 20%) can improve approval chances.

Collateral. The equipment itself often usually serves as collateral, reducing risk for equipment financing companies.

OnDeck requires a minimum personal credit score of 625 to be eligible for financing.

When people think of business equipment, they will generally think of larger industrial and mechanical equipment. They don’t always consider items such as office furniture, supplies or smaller office appliances and machines. When it comes to equipment loans and equipment leasing, any tangible asset (other than property or buildings) used in the operation of a business may be considered business equipment.

OnDeck equipment financing can be used for any legitimate business purpose. For instance, the primary purpose of the funds could be to pay for new equipment, but you may receive more funds to cover payroll, cash flow gaps or inventory purchases.

First, make sure you have the documents needed for the particular lender you’re applying with. The requirements for traditional lenders and online lenders are different, so the amount and type of documentation will vary depending upon the lender. For example, a loan at the bank may require a business plan while an online loan likely will not.

If you’re applying with a traditional bank, you will meet with a loan officer at the local branch. If you’re working through the equipment dealer, they will likely be able to handle your application on site. If you pursue an online loan, that application process will take place via their online website and possibly a phone call.

OnDeck’s application can be completed quickly and requires just a small amount of paperwork (such as your recent business bank statements) that can be easily submitted online.

Whether you decide to purchase or lease a piece of equipment, make sure you completely understand the terms and costs. Always take the time to read the disclosures and make sure anything unfamiliar or difficult to understand is explained to you.

Equipment financing commonly refers to one of two types of business funding: equipment loans or equipment leasing.

Equipment loans. Equipment loans are a form of secured funding in which the borrower uses the funds to purchase the equipment and the lender uses the equipment as collateral. Once the loan is fully paid off, the equipment is the business’s to keep, free of any lien.

Equipment leasing. With equipment leasing, the lender buys the equipment and then leases it to the borrower for a flat monthly fee. Most equipment leases come at a fixed interest rate and term length to keep the monthly payments the same. At the end of the predetermined lease term, depending upon the lease, the business owner may be able to purchase the equipment at fair market value or a predetermined amount — sometimes for as little as a dollar.

Like all types of business funding, there are pros and cons that come with equipment loans.

You should always consult with your tax advisor regarding what expenses are tax deductible. Interest on business funding may be tax deductible In addition Section 179 of the tax code may allow for deductions of certain business expenses. Section 179 allows business owners to deduct the cost of certain property as an expense when that piece of property is first placed in service. This could apply to items such as machinery or equipment. So not only can the interest on your financing be tax-deductible, but the equipment itself could be too.¹

¹This content is for educational and informational purposes only, and is not intended as financial, investment or legal advice.