Equipment Financing

Banks and online lenders offer equipment financing to help you buy expensive equipment and machinery for your business.

Equipment financing is a loan to buy machinery and equipment essential for running your business. You can use an equipment loan for anything from office furniture and medical equipment to farm machinery or commercial ovens.
There are equipment finance companies that focus solely on this type of small business loan. But you can also get an equipment loan from lenders such as the U.S. Small Business Administration and banks.

How equipment financing works

Equipment financing is a type of asset-based financing, which means that the equipment itself is collateral for the loan.

  • You can get an equipment loan equal to 100% of the value of the equipment you want to buy, depending on the equipment finance company you use and the qualifications of your business. You repay the loan over time, with interest.
  • Some small business lenders may also pay for soft costs, such as delivery, installation, warranties, assembly, and other one-time expenses needed to get your equipment set up and running. Certain equipment finance companies will finance these costs in addition to the total value of your equipment, offering, for example, 125% financing: 100% for equipment, and 25% for overhead costs.
  • However, other equipment finance companies may finance only a percentage of the equipment cost, say 75%, and allow the remainder of the loan (25%) to go toward your overhead costs.
  • Because soft costs generally require a large upfront investment when you purchase your equipment and do not add value to the equipment in the long run, it can be helpful to find an experienced equipment finance company that will finance some of these expenses. This way, you’re getting the same interest rate to finance the soft costs that you receive for the rest of your equipment loan, and you don’t have to use the funds you have on hand or get a separate loan to cover them.

Equipment Finance Rates and Terms

Payment terms and interest rates on equipment financing can vary depending on the equipment finance company, your company’s qualifications, and how long the equipment you are purchasing is expected to have value.

  • Anecdotally, equipment finance interest rates range from 4% to 30% APR.
  • In general, equipment loan terms are based on the anticipated useful life of the equipment or machinery you are purchasing. A shorter term may cause you to have difficulty making payments, and a longer-term means you will pay for the equipment after you stop using it.

Equipment financing versus equipment leasing

Lenders may offer equipment leasing as an alternative to equipment loans. With equipment leasing, you rent equipment from an equipment supplier, lender, or finance company. At the end of the lease, you return the equipment, renew the lease, or purchase the equipment.

  • On the one hand, equipment leasing can help reduce costs and maximize your investment. For example, equipment becomes less valuable and productive as it ages, so leasing for a limited time can be a smart decision. Some equipment leasing companies also offer the option to purchase the equipment at its current market value.
  • On the other hand, equipment leasing may cost more than financing if you plan to use the equipment for a long time. According to the Equipment Leasing and Finance Association, leasing is “probably the preferable option” for equipment you plan to use for 36 months or less. If you’ll be using it for longer, it makes more sense to buy it.

Advantages and disadvantages of equipment financing

Advantages

Affordable. Equipment loans can provide competitive interest rates and long terms. SBA 7(a) loans, for example, often offer terms of up to 10 years for equipment purchases.
Equipment ownership. You will own the equipment outright once the loan is repaid. If you need cash for other business purposes, you can enter into a sale-leaseback arrangement with the equipment finance company; that involves selling the equipment to a lender for quick cash and then leasing it back to that lender.
Self-guarantee. You may not need to rely as heavily on personal credit, time in business, or other collateral to qualify. Startups and businesses with bad credit may qualify for equipment financing.
Tax savings. At tax time, the interest you have paid is deductible and may also qualify for a depreciation tax benefit.

Cons

Obsolete equipment. If the financed equipment becomes obsolete, you must sell or dispose of it.
Down payment. An equipment loan may require a large down payment.

Where to get equipment financing

Online Lenders

Online equipment finance companies may offer access to equipment financing with more flexible qualifications than a traditional bank or SBA loan. Some online lenders work with startups or businesses with bad credit.
Many commercial online lenders also offer streamlined application processes and fast funding; in some cases, they fund loans within 24 hours.
Equipment loans from online equipment finance companies are typically more expensive than bank or SBA loans, however, they have shorter terms and higher interest rates.

Banks and credit unions

While banks and credit unions generally offer equipment loans with the most favorable interest rates and terms, they also have strict eligibility requirements. To qualify for equipment financing from a bank, you will generally need strong personal credit (a FICO score of 700 or higher), several years in business, and excellent financials.
However, if you can meet these requirements, obtaining an equipment loan from a bank or credit union will likely be your most economical option. In addition, some institutions, such as Wells Fargo, have business divisions dedicated to equipment financing in different industries.

SBA Lenders

As an alternative to traditional bank financing, you can work with an SBA lender (usually a bank or credit union) to obtain an SBA loan. SBA loans have long terms, usually up to 10 years for equipment loans, and low-interest rates. They also allow you to use the equipment you are buying, as well as the equipment you already own, as collateral.
To qualify for an SBA loan, you will generally need a good personal credit score, 690 or higher (although some SBA lenders may have lower score requirements), and solid business finances.

Obtain equipment financing in your industry:

  • Learn more about gym equipment financing.
  • Compare the best restaurant equipment financing options.
  • Find online lenders offering dental equipment financing.

Find the right commercial loan.

The best commercial loan is usually the one with the lowest rates and most ideal terms. But other factors, such as time to finance and your business qualifications, can help determine which option you should choose. FundingHall recommends comparing small business loans to find the right one for your business.