For many businesses, equipment makes a big difference in the bottom line. Whether it’s a new vehicle, a commercial oven, construction equipment, or something else, many businesses opt for equipment financing to make a major equipment purchase.

Taking out any type of business financing is a significant decision. You’ll need to do your research on financing solutions, gather documentation for a loan application, and figure out exactly what you can afford to repay.

In this article:

• Small business loans that support equipment financing
• What to do to prepare your business to apply for equipment financing
• How to choose the right lender

How can you finance an equipment purchase?

Business equipment financing can be done in a few ways. The most common is equipment leasing or using an equipment loan to buy the equipment outright. These loans use the equipment itself as collateral to secure the loan, so you don’t have to risk losing personal assets or additional business assets if you fail to repay the loan.

Purchasing equipment with this kind of loan is usually the best equipment financing for startups as it’s easier to qualify for than other small business loans.

Some other types of equipment financing you may use include:

• Term loans: The traditional loan in which you receive an upfront, lump sum of money that you repay with monthly payments, plus interest. Available from traditional banks and credit unions, as well as online lenders, term loans offer flexibility if you have more financing needs than just equipment. They tend to have stricter eligibility requirements than equipment loans.
• SBA loans: Loans backed by the U.S. Small Business Administration (SBA) are designed to partially guarantee loans and lower the risk profile of borrowers. The SBA offers several loan programs that may be useful for equipment financing but they also tend to have strict qualification requirements.
• Short-term loans: Sometimes referred to as working capital loans or cash flow loans, short-term loans that must be repaid within 18 months give businesses a quick influx of cash to buy equipment, pay for business needs, and get out of debt faster.
• Business line of credit: A cross between a business credit card and a term loan, a line of credit allows you to draw on a loan amount when you need to make business purchases. Rather than pay interest on the full loan amount, you only pay on the amounts you withdraw.

What to do before applying for equipment financing

Depending on the type of equipment and where you’re shopping, equipment financing can be very simple. Many vehicle or construction dealerships, for instance, offer financing on-site so you can find what you’re looking for, make a down payment, and purchase new equipment on the same day. It’s like buying a car.

However, many small business owners prefer to check multiple boxes with a single loan. If you’re applying for a business loan to support equipment purchases among other business purposes, this guide will help you streamline the process.

Find the right equipment financing option

Lenders offer a variety of loan products and funding options for businesses. Before you begin the process, it’s important to understand the basics of small business loans to know what’s available to your business.

Beyond exploring the types of equipment financing available, you should know the basic credit approval process, current interest rates, origination fees, and common loan terms.

Remember, you always the option to lease equipment if an equipment financing loan to buy the equipment outright feels too expensive.

Improve and maintain your credit score

Your personal credit score reflects your creditworthiness. It tells lending companies whether you pay your bills on time, have too many or too few credit lines, leverage debt effectively, and have a history of repaying loans. Since many businesses don’t have a business credit score, lenders weigh a personal credit score heavily.

You can get your personal credit report for free from each of the three major credit bureaus: Equifax, Experian, and TransUnion. You can also get your credit score free from several credit card issuers and personal finance websites.

If you have bad credit or no credit history, you’ll probably need to start slow. This is true for many startups, new companies, and small businesses. A good first step is getting a business credit card and paying off the balance each month. It will help you prove to credit agencies and lenders that you are worthy of getting more credit. Over time, it will help you score bigger loans with better terms.

If you need equipment fast, the best equipment financing for startups may be using a dealer’s financing program or leasing.

Organize your business records

The typical loan application asks about your business’s annual revenues, expenses, debts, and assets. Online lenders usually require fewer disclosures but it’s still a good idea to gather all of your records before applying. You need to be able to back up any claims on an application with paperwork and data.

Using a cloud-based accounting and bookkeeping tool will keep your business finances organized. These tools make it easy to manage your income and expenses, send and track invoices, generate financial reports, calculate taxes, and store bank statements, tax returns, financial statements, bank account information, and other documents.

You’ll be happy you were so organized when you go through a loan application process.

Figure out how much financing you need

Before applying for a business loan, you must determine how much cash you need. Getting too much funding could force you to pay too much interest and costly prepayment penalties if you repay your loan before its term is up.

Requesting too little money than you need may require you to go back for a second loan. Or worse, it could leave you unable to resolve a financial issue, complete a project, or take advantage of an opportunity.

Work with an accountant, financial professional, or loan expert at a reputable business financing company to determine the loan amount to apply for.

Determine how much loan you can afford

It’s one thing to know how much financing you need. It’s another to be able to pay it back.

Once you know how much cash you need, figure out how much you can repay. Analyze your monthly revenue and expenses to figure out the monthly payment you could realistically afford. Calculators are available online to help you determine how large a loan you can handle.

You might need to adjust the loan amount or type if you cannot repay the loan you want. For example, if you can’t afford a traditional term loan, you might still be able to leverage the flexibility of a business line of credit.

Keep crunching the numbers and reconsidering financing options until you find a combination you can afford to pay back.

Develop cash flow projections

Loan decisions are typically based on more than just financial history. Lenders also consider future cash flow, especially for loans that will be used to expand the business, like business equipment financing. Realistic cash flow projections will demonstrate your business’s future income and expenses based on how the loan money will be used.

Prepare accurate projections using your previous cash flow statements, balance sheets, and profit and loss statements. Attempt to show exactly how equipment financing will increase your business’s production or efficiency. When a lender sees a plan for using their loan funds backed by data, they may be more likely to approve your application.

Choose a type of financing

We touched on some of the most common forms of equipment financing at the start of this article. If you’re just looking to buy a single piece of equipment, an equipment loan tied to that equipment makes sense. If you have broader business goals, you might consider term loans or a business line of credit.

There are a few alternative forms of financing worth mentioning, too. Not all businesses will qualify for traditional funding. If you’re struggling to find capital, you may want to explore the following options:

• Business credit card: A business credit card is similar to a personal one. Use your credit card to make purchases and pay it back later, ideally in full each month, to avoid paying interest and improve your credit score.
• Merchant cash advance (MCA): You can use a merchant cash advance to exchange tomorrow’s sales for immediate cash. A lender provides you with a lump sum of money that you pay back with a percentage of your future credit card sales. MCA providers typically charge a factor rate rather than an interest rate, which determines a total amount that you must repay before the terms are met.
• Invoice financing: Also known as accounts receivable financing, this arrangement trades outstanding invoices for immediate cash from a factoring company. The factoring company keeps a percentage of the value of the invoices and collects on them, in exchange for upfront cash.

Identify collateral

Lenders want to reduce the risk of lending to you as much as possible. One way to do this is by requiring collateral, usually in the form of business assets like equipment and real estate, or personal assets like jewelry or stock holdings. If you default on the loan, they can seize these assets.

The equipment itself is usually the collateral for equipment financing. However, if you’re taking out a larger loan, the equipment you purchase alone may not suffice as collateral to secure the loan. You’ll need to consider what else you can put up to secure the loan.

Complete or update your business plan

Most lenders want you to explain how you will use the loan money, including:

• What you will spend it on
• How the funds will help your business
• When you expect to see a return on the loan money
• What impact it will have on annual revenue

The best way to explain all these things is with a complete and current business plan. If you haven’t written one — or updated an existing one lately — you should complete it before applying.

Not every lender will require a business plan, and it’s not always required for equipment financing, but it’s still a good idea to have. The additional research and planning will help you strategically use your funds, establish realistic repayment plans, and prepare for worst-case scenarios.

Choose the right lender

Every lender is different and serves a unique purpose.

• Large financial institutions provide big bank loans to enterprise clients for working capital and other reasons.
• Local banks are often friendlier to small businesses that contribute to their communities.
• Alternative lenders usually provide faster funding to businesses but often charge higher interest rates.

Take time to research your lending options. Look out for ones that are financially sound, reputable, and have positive ratings and reviews from clients.

Final Thoughts

Equipment financing can give your business a major boost. Regardless of your equipment needs, you have a number of payment options, from equipment loans to more flexible financing like a business line of credit.

Small business owners should be knowledgeable about loans and lending, but they don’t have to become experts. Don’t be afraid to seek professional advice.

A bookkeeper, accountant, financial advisor, or loan officer can all be great sounding boards to help you determine how much funding you need, how much you can afford to pay back, and the right loan type and provider. Getting support will help you feel confident you’re securing the right financing for your business.

FAQs about Equipment Financing

What is equipment financing?

Equipment financing is any loan option that’s used to finance an equipment purchase. This may include a basic equipment loan or more comprehensive financing options like a term loan.

What types of loans can be used to finance equipment?

You can use many types of loans to buy equipment. Equipment loans are one of the most common, but you may also use term loans, SBA loans, business lines of credit, or a business credit card.

What’s the best equipment loan?

The best equipment loan is one that you can afford to repay and doesn’t saddle your business with exorbitant interest rates and loan fees. The best for you may not be the best for someone else, so it’s important to do your due diligence before getting an equipment financing loan.

What should you do before applying for business equipment financing?

Some of the steps you should take before applying for any loan include researching lenders, determining how much funding you need, determining how much you can afford to repay, figuring out the right loan type for your business, and gathering your business’s financial documentation.

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