Equipment Financing

Equipment financing typically refers to a loan used to pay for the purchase of business equipment. The type of equipment varies depending on the nature of the business. With an equipment loan, the equipment purchased will most often act as collateral to secure the loan. This allows the lender to offer the loan for a better interest rate than standard small business financing options.

The term equipment financing can also refer to equipment leasing. With this type of business funding, the lender owns the equipment and the borrower pays flat monthly payments to use it. The lease payments include an interest rate, however payments may be smaller than an equipment loan since the lender doesn’t need to recover the full cost of equipment. This can be a good option for equipment that may go obsolete and need to be replaced within the span of a few years.

Equipment loans can come from a variety of sources depending upon your creditworthiness and the nature of the equipment being purchased. These sources may include:

• Commercial banks
• Credit unions
• Online lenders
• Government-backed SBA loans

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. An SBA 504 loan will require a 10% down payment. As with most loans, the interest on an equipment loan is tax deductible.

Depending upon the equipment, lease terms could last from typically three to 10 years. The equipment is owned by the leasing company, which charges you a flat monthly fee that includes an interest rate of typically 5% to 16%. If you pursue equipment leasing, ask your tax accountant about whether the monthly payments could be deducted as a business expense.

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.

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 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 will take place via their online website and possibly a phone call.

Whether you decide to purchase or lease business 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.

As with all business financing options, there are pros and cons that come with equipment leasing.

Like equipment leasing, there are pros and cons that come with equipment loans.