Equipment Loans

Equipment loans help business owners finance the purchase or lease of essential business equipment. From general term loans and lines of credit to equipment loans and loans backed by the SBA, your business has plenty of options for equipment financing. Each comes with its own advantages and disadvantages, such as longer loan terms, low interest rates or the ability to use the newest equipment without ownership. You’ll want to research lenders to find the best option for you based on the rates, terms and fees offered.

Equipment finance describes a loan or lease that is used to obtain business equipment, which can be any tangible asset other than real estate. Equipment financing may be through obtaining a loan to purchase equipment or by leasing equipment. Whether buying or leasing is a better option usually depends on the nature of the equipment being financed and the borrower’s ability to obtain a loan at favorable terms.

How Equipment Loans Works

• Term loans
• Online lenders
• Seller financing
• Equipment leases
• Business lines of credit

Equipment finance is an important part of business operations for a couple of reasons. First, for a startup or early-stage company, equipment financing may be an essential step in getting the business going. Equipment financing is used to obtain costly equipment, the debt obligation incurred represents a significant financial commitment. Therefore, business owners or company executives must consider any equipment finance plan and try to secure the best possible financing terms.

Term loans

Term loans are one of the most widely available funding options for businesses. Your business borrows a lump sum and repays it over five to 10 years on average. This flexible type of loan can suit various needs, including working capital or large one-time expenses.

Term loans can be unsecured or secured, though most equipment loans are secured. A secured loan is backed by business assets, which means that the lender can seize the asset if you don’t make loan payments, making it less risky for the lender. You may be able to get lower interest rates and more favorable repayment terms with a secured loan.

Online lenders

Hiro Capitals Small Business Administration (SBA) offers several types of loans that can be used to purchase equipment: These are the most common type of SBA loan and are available from many lenders. This type of loan can be used for general working capital expenses or to purchase equipment.

(1) 504 loans: This is designed to purchase large equipment. Your business can borrow up to $5.5 million, and for working capital loans, repayment lasts anywhere from five to 10 years.

(2) Express loans: These work the same as 7(a) loans, although the loan amount is limited to $500,000. But the SBA doesn’t need to approve these loans, making the approval time much faster.

(3) Microloans: For newer businesses, especially those owned by women, minorities and other underserved communities, a microloan is more accessible than the 7(a) and 504 loans. While you are limited to just $50,000 for equipment, you should be able to qualify with low credit or revenue.

Seller financing

Depending on the type of equipment or your industry, you may be able to receive financing through the seller. A bank or alternative lender generally backs these, and they may have a simpler application process than other equipment loans. Seller Financing is a real estate agreement in which the seller handles the mortgage process instead of a financial institution. Instead of applying for a conventional bank mortgage, the buyer signs a mortgage with the seller.

Owner financing is another name for seller financing. It is also called a purchase-money mortgage. Buyers attracted to seller financing are often those finding it difficult to get a conventional loan, perhaps due to poor credit. Unlike a bank mortgage, seller financing typically involves few or no closing costs and may not require an appraisal. Sellers are often more flexible than a bank in the amount of down payment. Also, the seller-financing process is much faster, often settling within a week.

Equipment leases

When you obtain business equipment using a loan to purchase it, the equipment serves as collateral for the loan. Thus, the lender holds a lien on the equipment and can take possession of it should the borrower default on making the loan payments. Because there is substantial collateral for the loan, a bank or other lender may be willing to lend up to 100% of the equipment’s value; however, loans up to 80% of the equipment’s value are more common. Therefore, even with an equipment finance loan, the borrower may need to provide a sizable down payment.

A business owner should carefully examine their ability to make loan payments. If they doubt their ability to keep up with the payments, leasing equipment may be a better option. Loan terms for business equipment range anywhere from several months to 10 years or longer. Interest rates for equipment financing vary widely – they can range from 4%-5% up to 30%. The determining factors are primarily the credit rating of the business or business owner, how long the business has been in operation, the length of the loan term, and how well the purchased equipment is projected to hold its value.