Equipment Financing

Before you take out a loan of any kind, you need to investigate all of the loan options available to you. It can seem a little complex with all of the jargon and all of the different lending institutions, rates, terms, and conditions.

But equipment financing is a relatively straightforward business model that is easy to understand and easy to obtain. If you need equipment for your new business (whatever equipment this may be), then this loan is for you. More details are given below.

Equipment financing is a little different from inventory financing. The main difference is that with equipment financing you are purchasing equipment and using this as collateral. With inventory financing, you are using the inventory as collateral.  

It’s also different from equipment leasing. With equipment leasing, you do not own the property unless you buy at the end of the loan. But with equipment financing, you are advanced the money initially to buy the equipment immediately as the equitable owner.

What is Equipment Financing?

Equipment financing is a loan generated specifically for the purpose of the purchase of equipment. The term ‘equipment’ denotes tangible assets such as computers, freezers, vans, trucks, tools, and all other functional equipment that is necessary for the running of the business. But it can also be taken out for specific types of software. Land and property do not fall within the category of equipment, and there are special loans for these assets.

With an equipment financing loan, the total amount will not exceed the total economic value of the equipment itself. You still pay interest on the loan, but it is not as steep as other methods (such as credit cards or working capital loans). The reason is that the loans are collateralized by the equipment. If you fail to pay, then the equipment will be seized by the lending institution.

The equipment financing model is a simple and straightforward loan process that is useful for particular businesses, who need essential equipment to get up and running. The most important item to keep in mind is that equipment financing is a loan, not a lease. You own the equipment and simply have to make payments. With a lease, you are renting the equipment and do not own it. With equipment financing, you can claim depreciation on your asset to reduce tax liability as to the legal owner of the asset.

Pros

  • The equipment acts as collateral
  • Easy to acquire
  • Flexible options

Cons

  • Equipment costs more than it normally would

What Sort Of Business Might Use Equipment Financing?

Equipment finance is often best suited for startup companies who are finding it difficult to obtain traditional means of finance. This is because equipment finance is easier to obtain in comparison to other kinds of financial options (the equipment itself acts as collateral in the event of loan default). Another added benefit is that equipment finance can be (in some instances) cheaper compared to other loan types.
But any business that needs equipment can avail of this method, not just startups. If you are starting a restaurant, then you will definitely need to get ovens, fridges, and other essential equipment. This equipment can cost tens of thousands of dollars, which is simply too much to pay upfront. Equipment financing is the most sensible option as you will need that cash for other operational expenses. A technology startup might also need to purchase office computers and other office supplies. Again, equipment financing could be the best option.

But more commonly, equipment financing is relevant for construction and transportation companies, who need trucks, motor vans, cranes, diggers, power tools, and other kinds of heavy-duty equipment that is incredibly expensive to purchase upfront. It often depends on the scale. If you only need to buy one item, then it might be better to make the purchase yourself. But for many items or items of a huge cost, equipment financing is the way to go.

These are the ‘traditional’ uses of equipment financing. People typically think of tractors and freezers when it comes to equipment financing. But there are way more niches uses. If you are involved in the purchase of any kind of work-related equipment, you can get an equipment financing loan for it.

  • Solar panels and air conditioning units.
  • Office equipment  – lights, chairs, printers, carpets, paintings, etc.
  • Blenders, refrigerators, ovens, coffee makers.
  • Smartphones, computers, iPads, video games consoles, music stations.
  • Gym equipment and relaxation facilities for employees.
  • Software including operating systems, application, and accountancy software.
  • All kind of delivery vehicles
  • Clothes and uniforms.
  • Point of Sale (‘POS’) payment processing systems.
  • Welding and soldering equipment
  • Saws and industrial sawhorses
  • Painting or pressure washing equipment
  • Landscaping tools and equipment
  • Ladders and scaffolding

As long as the equipment is work-related, it can be financed. Whether or not it’s an essential item worth buying is up to you. All loan payments add up, even if they are framed as ‘one easy monthly repayment’.

Equipment Financing Rates

While the equipment financing rates are very competitive (due to the collateral supplied), they tend to have high minimum loan amounts. Some require borrowers to finance a minimum of at least $20,000, though it will also depend on what kind of loan you are looking for. If this is too high, consider a term loan or business line of credit (which you could use to fund the equipment anyway).

There is little standardization for equipment financing rates because there are so many different types of equipment. It’s important to distinguish equipment financing from inventory financing and equipment leasing, where the average rates will be different. Here is a table outlining the differences. Obviously, the rate and terms will depend on your specific situation, what your credit score is, and what you are looking for.

Loan TypeLoan to Value RatioAverage interest RatesRepayment TermsFunding SpeedMinimum Requirements
Equipment Financing100%7% – 17%1 – 15 Years48 hours12 months in business, 600 credit score, $50,000 annual revenue. 
Inventory FinancingUp to 80% advance of the total loan. 1% – 35% (additional inspection fees may apply)0 – 1 year48 hours12 months in business, 600 credit score, $50,000 annual revenue.
Equipment LeasingN/A6% – 20%2 – 5 years (will not exceed the economic life of the equipment)48 hours12 months in business, 600 credit score, $50,000 annual revenue.

How to Get Equipment Financing

Most of the online and historical lenders will also provide equipment financing in tandem with their other offerings. Because of the nature of the equipment financing loan, it is often easier to obtain in comparison to term loans. This is because the loan is automatically collateralized. There is less risk for the lender as they will merely take their assets back if the debt is not paid.

However, there are still going to be some parameters. Nobody is simply going to lend you high-quality equipment worth more than $10,000 without knowing some essential information. The most commonly cited minimum criteria for acquiring equipment financing will include:

  • Minimum of 12 months in business.
  • Minimum annual revenue of $50,000.
  • A credit score of 600 and above.

These are the typical minimum requirements, but it will often change depending on your unique business situation. If you can demonstrate strong cash flow for the previous 12 months, then a lower credit score might be overlooked. But the weaker your application, the higher the interest rate will be.

Note that the above points are the absolute minimum. You are likely to encounter many lenders who will want a minimum of 2 years in business and $100,000 in annual revenue to consider equipment financing. It depends on many factors.

Best Equipment Financing Lenders

Many online lenders that generate other loan types facilitate Equipment Financing. The best online lenders can include:

ondeck OnDeck offers both the term loan (up to $500,000) and the line of credit (up to $250,000). Applicants will need a 600 credit score and 3 years in business, as well as $250,000 in annual revenue. But OnDeck actually offers equipment financing directly. Equipment Financing Agreements (‘EFAs’) up to $500,000 area available with a term length of 2 – 5 years. The other criteria relating to credit score and minimum time of business will still apply. 

lending club Lending Club offers crowdfunded business loans from $5,000 to $500,000. However, the eligibility criteria can be quite stiff, with $100,000 in annual revenue and a credit score above 600 required for many loans. Equipment financing loans are directly available with this lender.

SmartBizSmartbiz primarily offers SBA loans, connecting applicants within its network of lenders.  But you can use the SBA(7)(a) loan for the purchase of equipment. The caveat is that you cannot use the equipment you intend to purchase as the collateral for the loan itself, and it is not technically a pure equipment financing loan in this sense. The criteria for this loan is quite strict. You must be in business for a minimum of 2 years with a minimum credit score of 640. 

kabbageKabbage only offers the Line of Credit from $5,000 to $250,000, not the standard Equipment Financing loan. You will need $50,000 in annual revenue to qualify, but the qualification process is quick and painless. The loan can be used to purchase equipment but is not strictly an equipment financing loan. 

LoanBuilderLoanBuilder offers loans ranging from $5,000 to $500,000. Minimum eligibility criteria are 9 months in business and $42,000 in annual revenue. Only short terms loans (12 months max) are offered through this lender. Like Kabbage, It does not offer equipment financing loans, though the money can be used to purchase equipment. 

Conclusion

Equipment financing is one of the most straightforward loan options available to business owners. It is very commonly used and frequently necessary for a new business. After all, paying $10,000 and above for equipment when you are starting a business does not make the most sense.

And even if you are already started, it’s still a large amount of money to pay off in one purchase. For more information about loans and financial avenues, take a look at some of the online lenders mentioned above, or get in contact with a Finimpact representative.