What is Equipment Financing?
With equipment financing companies, you make a downpayment for the cost of the machinery. Then, an equipment leasing company or loan company will pay the remaining balance and you pay them back in installments (including interest payments) over a period of time. The amount of money that your lender gives you is secured by the piece of equipment being purchased. This means that, if you fail to make payments or default on payments, the item you purchased is taken away. As equipment financing is a form of secured loan, it’s easier for businesses with a poor credit rating to obtain the loan, because the lender knows they can use the equipment as security. Equipment financing is common - and it’s so widely offered that even US bank equipment finance is available. As well as traditional lenders like banks, equipment financing is also available through non-traditional lenders such as online providers.
How Does Equipment Financing Work?
Business equipment financing is usually viewed as a cost-effective and lower-risk way to acquire machinery than other forms of financing. Plus, with heavy equipment financing, you get to maintain your cash reserves because you don’t need to purchase the item outright. Each lender who offers equipment financing and small business equipment loans will have different terms, but you can usually finance around 80% of the asset’s total purchase price. Generally speaking, you pay the initial 20% of the cost and then repay your lender over the term of the agreement in regular payments. The amount you borrow will usually determine the length of the loan.
Who Qualifies for Equipment Financing?
Commercial equipment financing and industrial equipment financing solutions are available to most businesses that use some form of equipment. The term "equipment" in this scenario can take many forms, including everything from farming machinery to computers. However, different lenders will have different qualifying criteria. In most cases, you’ll need to prove that you have a credit rating of over 600 and the ability to service your equipment loan or lease.
How to Apply for Equipment Financing
Applying for equipment loans from equipment financing companies is relatively straightforward, but you’ll still need certain documents and information:
Voided Business Check
Your lender may ask to see a voided business check to confirm details relating to your account. You can do this by writing "VOID" in big letters across a check and sending it either through the post or in a photo.
Some lenders will also ask for bank statements so they can verify the financial information you’ve provided to obtain the loan.
Your credit score may affect the terms of the loan you’re offered. Generally speaking, the higher your credit score, the lower the interest rate you’ll be offered and the more likely you are to be accepted for equipment financing.
Business Tax Returns
Like your bank statements, your tax returns can be used to verify financial information.
Equipment Leasing Option
Equipment leasing is a popular alternative if you don’t have the downpayment that you often need for a loan. Plus, when leasing, you also usually pay less in terms of shipping and installment costs compared to equipment financing. Leasing is also popular with companies that regularly switch out their equipment for new and updated versions. With leasing, instead of buying the equipment, you borrow it, and the lender always maintains ownership. If you do want to own the equipment, then some equipment leasing companies will offer the option for you to buy the equipment for a fixed price at the end of the term, but you’ll need to negotiate this before you sign.
Equipment Financing vs. Equipment Leasing: What’s the Difference?
Business equipment leasing works in a similar way to equipment financing. But the crucial difference between small business equipment financing options and vendor leasing products is that leasing only effectively allows you to borrow the machinery in question. Once you’ve paid off an equipment financing loan, you then own the piece of equipment. By contrast, at the end of a leasing agreement, you usually have the option to renew your lease, return the equipment or pay a set amount to buy the equipment from the leasing company.
Equipment Financing for Items Under $50,000
If you’re buying a piece of machinery or equipment that costs under $50,000, then you’ll find some companies that specialize in offering small business loans specifically for this reason. Generally speaking, the maximum repayment term for a loan of this size is six years, and interest rates are between 8% and 13%. However, this will depend on your creditworthiness and the lender you choose, so check your terms carefully.
Equipment Financing for Items $50,000 and Over
If your item costs over $50,000, you’ll still have plenty of options when it comes to getting a business loan. In fact, some of the best small business loans allow you to borrow up to $2,000,000, depending on your creditworthiness and your business’s performance. For a loan of this size, you’ll usually need a good credit history and evidence of your business’s growth plans. If a traditional bank won’t provide you with a loan of this size, try an online lender.