Disclaimer: Information in the equipment financing articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the equipment financing articles often covers financial products that Biz2Credit does not currently offer.

If you’re a small business owner who’s considering borrowing money to purchase or lease equipment for your business, you may want to consider an equipment loan. Depending on the lender, these types of small business loans can be fast and relatively simple, depending on the type of equipment you’re financing.

However, the application process can be intimidating to the unfamiliar. Many startups or new businesses, for example, aren’t sure how to get a loan. Even if you’re already in business, it’s a daunting process to figure out how to get a business loan that works best for you.

Before you apply, you should consider various factors as well as your loan options to get the best equipment financing for your business needs.

What are equipment loans?

First, let’s find out more about equipment loans.

Equipment loans are a type of business financing that provide the capital needed for equipment purchases. Equipment includes anything from construction apparatus to computers, company vehicles, furniture, machinery, and more. Equipment is found in every industry from restaurants and hospitality businesses to the medical industry to construction firms, auto repair shops, and more.

Equipment financing providers include:

• Traditional banks
• Credit Unions
• Online lenders

These small business lenders offer different types of financing for equipment. Not all types financing used for equipment purchases are traditional equipment loans. Some of the financing you may consider include:

• Basic equipment loans
• Lines of credit
• Term loans
• Credit cards
• Working capital loans
• Revenue-based financing

We’ll review the basic steps to help you get the equipment loan you need for your business.

Step One: Determine what kind of equipment you need.

Before applying for a loan, you’ll need a good idea of what type of equipment your business needs. Any lender will probably want to know which equipment you plan to buy and how much it will cost.

Equipment loans are different than many other types of loans in that the equipment you purchase with your loan funds serves as collateral. In some cases, a lender might even want professional quotes from a vendor to verify the costs. If the equipment will be collateral, you will need to have key details about that equipment such as the SKU, MSRP and possibly other details.

In any case, you’ll need to tally up all of your costs so you know the loan amount you need to borrow.

If you’ve been in business already for a little while and will have a new note, determine how it could change any projections you made in your business plan. If you got a loan to buy a business, your equipment financing costs have to be factored against the cost of your original financing.

Review your current operational cash flow and ensure it can handle a new monthly expense. Ideally, any business plan you already worked out planned for any additional, future expenses and financing costs. If not, your lender can help you calculate your cash flow projection and debt service coverage ratio (DSCR) to ensure your business won’t struggle to make its repayments.

If the funds from your equipment financing are going toward a repair or replacement of existing equipment, your business plan may not experience much of a change. The same goes for upgrading a technology to keep up with the times. But if there are different reasons for getting the equipment, it could change your business plan significantly – and you’ll need to take a different approach.

Depending on the amount you need to borrow, you may have to submit a new business plan to your lender. This is particularly the case for larger loans and new small businesses. But if you just want to buy a piece of equipment or two, you can probably get away without a business plan. If you’re buying expensive construction equipment and lots of it, you’ll want a detailed business plan to convince a lender to loan you money.

Do diligent research and project the changes that will come with the new equipment, and then revise your business plan accordingly. Be realistic, but it’s important to have an idea of where your company will be a year, two or five years after getting your business’s new equipment.

Step Two: Should you buy or lease?

If you’ve done your research and feel strongly about acquiring new equipment, you probably already know whether or not you want to buy or lease your equipment.

Equipment financing might require a 20% down payment. If you don’t have enough for a downpayment, you may need to search for a lender that doesn’t require a downpayment and offers 100% equipment financing.

If you go the route of equipment leasing, you might not have to worry about a downpayment. But you also won’t own your equipment which means there is less value on your business’s balance sheet. This isn’t a bad thing if you’re in a business where the equipment quickly becomes obsolete as it can be harder to sell outdated equipment. If your industry’s equipment is updated a lot, then it’s easier to replace equipment when you lease it.

But that’s not always the case. Most small business owners prefer to own their business’s equipment because many consider leasing a waste of money. They have nothing to show for it in the end.

However, if you buy your equipment and use financing for the purchase, you’ll have to make regular payments until the loan is paid back.

Step Three: Review your creditworthiness.

Even though it’s often easier to get an equipment loan because there is collateral involved, evaluate your credit and business loan qualifications from a lender’s viewpoint. The better your business and credit standing, the lower the interest rate on your equipment loan.

Some equipment loan lenders will review your personal and business credit reports. It’s a good idea before you apply for a loan to ensure that nothing is amiss on either report.

Analyzing your business’s finances is prudent regardless of whether you’re seeking a new loan, but doubly so at that point. In addition to your credit history, a lender will also want to evaluate how long you’ve been in business and your business’s annual revenue.

If your credit history is not as strong as it needs to be to get a traditional equipment loan loan, online lenders may still offer revenue-based financing.

Again, the higher your credit score and the longer you’ve been in business, the more likely your loan will be approved and the more favorable the loan terms will be.

Step Four: Find the right lender.

Most equipment financing options typically fall under two types of loans - traditional loans and online business loans.

Most small business owners who need equipment need it now. Time is money, and you likely need the equipment to run your business at capacity. This is why it’s best to evaluate your credit and business standing the way a lender would so no time is wasted.

But if you have great credit and aren’t in a rush for your equipment, take your time and compare rates, downpayment requirements, fees, loan payments and repayment terms to determine the best deal for your business needs.

If you have a low credit score or you’ve only been in business for a few months, you probably won’t meet the eligibility requirements for most traditional business bank loans. In that case, you may want to start by looking at online lenders as you may still qualify for financing.

Step Five: Prepare documentation.

Most lenders will want to examine financial documents about your business before they invest in it. Your job is to ensure that all your documentation is in order before you move to the application stage.

The type of business loan requirements and documentation will vary from lender to lender and may include any or all of the following:

• Business plan
• Financial statements, including cash flow statements
• Balance sheet
• Tax returns
• Insurance policies
• Bank statements
• Accounts receivables
• Business license

It’s also a good idea to have any quotes of equipment you plan to buy to show your lender. In your business plan, you can outline how you plan to use it and how long you project the equipment will last.

It’s essential to have all documents required by the lender because one missing document can lead to a declined application or delay in the approval process.

Step Six: Re-evaluate after the decision.

With the right company, you could get a decision and the cash you need within a couple of days of applying. If you’re approved, congratulations.

Be sure to look over the paperwork before signing on the dotted line. Make sure you can commit to the repayment plan the lender is offering you. If you’re getting a term loan or something with regular monthly payments, you’ll need to budget those payments and make them on time. If you pay your notes on time, it’ll help you build good business credit so that you can get future business loans on better terms.

Once you have your loan funds and new equipment in hand, put it to work as soon as possible to evaluate its benefits to your company.

If you aren’t approved, ask the declining lender why. If it’s something you have power over, consider making necessary changes and reapplying for the loan. Or maybe it turns out an equipment loan wasn’t the best option after all. You may want to look into lenders that offer alternative types of funding to get the capital your business needs. Just ask Yousaf Razzak. Biz2Credit provided the funds he needed to expand his restaurant when traditional lenders weren’t receptive to providing him a small business loan.

FAQs about Equipment Loans

What are typical equipment loan terms?

Most lenders won’t extend the loan any further than the equipment will last. So, if your equipment has an average useful life of five years, the lender won’t offer repayment terms past that and may even want a shorter term to allow for depreciation. Interest rates can vary widely. SBA loans can range from 10% to 13%, while a bank loan for a borrower with excellent credit can cost 10% to 15% or even more depending on the performance of the business. Borrowers with lower credit scores can pay as much as 30% or more in some cases. Many factors play into how much interest is charged.

Does an equipment loan provider look at personal or business credit?

It depends on the lender. Some look at one or the other and some look at both. The good news is, since the equipment is collateral for the loan, lenders are more likely to be flexible about credit scores than they would be with other types of financing.

How easy is it to get an equipment loan?

Of all the small business loans, it’s probably the easiest to be qualified to receive due to the equipment functioning as collateral. However, the application process might be longer and there will be greater restrictions around the use of capital once the loan is issued.

Do all business equipment loans require a downpayment?

It’s possible to get an equipment loan without a downpayment in some cases. Many factors will play into whether or not one is required and how much will be required. These factors include your credit, the type of equipment, and the lender.

How does an online lender differ from a bank or the SBA?

An online lender is a specialized business lender with a lot of experience working with business owners in different industries. Rather than just having a set of strict guidelines to use in the underwriting process, a lender gets to know the business owners they work with to help them get the financing solution they need, whether to buy equipment, real estate, expand their business, or get short-term working capital for a slow season.

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