Running a business often requires expensive tools, vehicles, or machinery. Instead of paying out of pocket, many small business owners use equipment financing to get what they need and pay over time.
This type of loan is designed specifically to purchase equipment. It’s straightforward, and the equipment you buy usually serves as the collateral for the loan.
What Is Equipment Financing?
Equipment financing is a loan used to buy physical business assets like machines, trucks, computers, kitchen appliances, or manufacturing tools.
You borrow money to buy the equipment, then repay it over time with interest. If you don’t repay, the lender can take the equipment.
The terms usually match the life of the equipment. If a machine is expected to last five years, your loan may have a five-year term.
When to Use Equipment Financing
This loan is useful when:
- You need to replace old or broken equipment
- You’re expanding and need more tools or machines
- You want to preserve cash for other business needs
- You don’t want to tie up a line of credit or use a credit card
It’s often used by construction companies, restaurants, medical offices, and manufacturers.
Common Features
- Loan amounts depend on the equipment’s cost
- Terms typically range from 1 to 7 years
- Down payments are sometimes required (5% to 20%)
- Interest rates vary based on credit and lender
- Equipment acts as the loan’s collateral
Pros
- Easier approval than unsecured loans
- Builds business credit when payments are on time
- Helps maintain cash flow
- You own the equipment once the loan is paid
Cons
- Interest and fees can raise total cost over time
- You may be stuck with outdated equipment once it’s paid off
- If equipment breaks early, you still owe the loan
- Some lenders require a down payment
How to Qualify
Most lenders look at:
- Business credit history or owner’s personal credit
- Time in business (often 1 year or more)
- Business income and bank statements
- Price and condition of the equipment
- Equipment’s resale value
If you’re a newer business, you may still qualify, especially if the equipment has strong resale value.
Types of Equipment That Can Be Financed
- Vehicles (delivery vans, work trucks)
- Commercial ovens or kitchen gear
- Medical or dental equipment
- Manufacturing or industrial machinery
- Computers, printers, or office tech
- Point-of-sale systems
Some lenders also cover used equipment, but terms may be shorter.
Choosing a Lender
Banks and credit unions often offer competitive rates but may take longer to approve. Online lenders and equipment vendors can approve loans faster, but rates might be higher.
Some equipment suppliers offer financing directly. In those cases, be sure to compare with other lenders to avoid overpaying.
Tips for Success
- Compare loan offers before committing.
- Make sure the equipment is essential to your business.
- Understand how long the equipment will last and how long you’ll be paying.
- Ask if the loan includes fees, warranties, or service agreements.
- Keep up with maintenance so your investment lasts.
Final Thoughts
If your business depends on having the right tools, equipment financing can help you get up and running without draining your cash. It’s one of the more accessible types of loans because the asset secures the loan.
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