Equipment financing allows businesses to buy equipment and machinery for business and pay for it over time. Typically, the equipment or machinery being purchased with an equipment loan is used as collateral to secure the loan. Meaning, if for any reason a business should happen to default on the loan, the lender has the right to seize the equipment and machinery to cover the remaining balance of the loan.
Equipment financing is most commonly used to purchase more expensive equipment and machinery that would normally take up a large portion of a company’s cash flow. By financing the purchase of the equipment and machinery needed when first starting out or expanding to keep up with increased demand, a business can hold on to more of its cash reserves by paying for the purchases over time with monthly payments.
Some of the most common types of equipment purchased with equipment financing include the following.
Again, when a business is looking to purchase equipment like what is listed above, they can use equipment financing to get the equipment and machinery they need now and pay for it over time. This allows them to hold on to more of their working capital while having access to the equipment immediately to use it to generate revenue.
Fast Equipment Financing
Typically, equipment financing works when a business owner identifies some large purchases of equipment or machinery that is needed to either start a business or to expand. For example, if you’re working on opening your own clothing store, you may need to purchase things like shelving, mannequins, display tables, and a POS system to complete orders and track inventory.
Once you have an idea of how much money you are going to need to make all of the required purchases, you can then approach a lender and begin the conversation about equipment financing.
Most equipment loans are secured loans that use the equipment purchased as collateral. Additionally, depending on your creditworthiness, the amount of revenue you generate, and your time in business, a lender may ask you further to secure the equipment loan with additional business assets. They may even ask you to secure the equipment loan with a personal guarantee depending on the size of the loan and your creditworthiness. A personal guarantee gives a lender the right to seize the personal property and assets of anyone who possesses a 20% or more ownership stake in the business.
Another important point to remember is that most lenders are going to require a down payment, typically somewhere around 20% or higher.
Once all the fine details have been sorted out with the lender and the equipment loan has been approved, you will receive the large lump sum payment into the designated account. With the money in hand, you can begin making all of the equipment purchases you need and start using it to run your business. Some lenders will pay the supplier directly for the equipment. Once the loan has been funded, the business must adhere to the predetermined repayment schedule. When the loan is paid off, you will own the equipment without strings attached.
It’s important not to confuse equipment financing with equipment leasing. Equipment financing is a business loan acquired through a bank, credit union, or online lender that uses the equipment purchased as collateral to secure the loan. As long as the monthly payments are met, the business retains ownership of the equipment until the loan is repaid.
Equipment leasing is entirely different. Equipment leasing is where the equipment ownership is retained by someone else, and your business pays rent to use it. The amount of rent and the length of the rental period is agreed upon between the owner of the equipment and the business looking to lease it. At the end of the rental period, the owner of the equipment and the business leasing the equipment can decide to let either the business buy the equipment outright, or they can renew the lease.
There are numerous benefits to using equipment financing to get the equipment and machinery your business needs. Here are some of the most attractive benefits any business owner like yourself can enjoy.
Equipment financing can be a wonderful way for new businesses to get all of the equipment they need to operate without spending all of their much-needed cash reserves. However, some downsides should be considered before signing on the dotted line.
Here are some of the pros and cons of equipment financing.
It’s easier to qualify for equipment financing than it is for other types of business financing. The main reason is that equipment loans are almost always secured. When you take out an equipment loan, the equipment and collateral you purchased are used as collateral. Because of this, most lenders see equipment financing as less risky.
Although the minimum requirements for qualification differ from lender to lender, in general, a business owner with a FICO score of at least 650, annual revenue of at least $120,000, and 6 months or more of time in business should have options for obtaining equipment financing.
The loan terms for equipment financing can vary depending on the lender, the size of the loan, and the type of equipment being purchased. Typically, equipment financing can come with terms that span as little as 24 months to up to 7 or 10 years if the equipment is costly.
Lenders that specialize in equipment financing typically want to see a minimum credit score somewhere in the range of 650 to 680. Some lenders may be willing to work with a potential borrower with a credit score of less than 650 if they can show that they can generate a large amount of revenue and if they have a good amount of time in business. To find out the likelihood of qualifying for equipment financing, review your SMBscore. At mySMBscore you can find ways to increase your chances of qualifying for business financing at a lower rate.
You can find equipment financing through manufacturers, banks, credit unions, and online lenders. Most lenders will advertise rates and terms, but what you actually qualify for is another story. Take advantage of a credit monitoring platform that lets you know where you stand through the eyes of the lender. At mySMBscore you can view your business credit score and other factors that a lender will use to approve a loan. You can even access loans that are recommended for you. At the end of the day, financing is a valuable resource, but it can be costly. It’s important to always be financially aware and lock in the best financing when possible.
Before you seek equipment financing, you should determine what equipment will cost and the likelihood of qualifying for financing. Determining the equipment cost will give you insight into how much money you’ll need to borrow. The likelihood of qualifying for a loan will matter too. It also gives you insight into how much financing might cost you. Before securing the financing you should improve the health of your business finances and credit as much as possible. At mySMBscore you can access insights about how to run your business better and how lenders will view you when you apply for a loan. Using this information, you can improve how your business is run and prepare for financing. As a result, you can keep financing costs down and lock in a competitive loan.
When you’re ready, you can shop for equipment financing offers. Some manufacturers may offer to finance, but other options include SBA loans, bank loans, or even loans from online lenders. Online lenders typically have the most lenient requirements and fastest funding times. By understanding your SMBscore you will have a more realistic idea of what a competitive loan should look like. Always be sure to check a few different offers, as even a small rate discount can make a big impact on a large loan.
Unlock analytics that will help you lock in low-rate equipment financing. . . check your SMBscore now!