Equipment Financing
What is Equipment Financing?
Equipment financing is a good option for businesses looking to buy or lease new or used equipment, such as commercial vehicles, office furniture, heavy machinery, and other industry-specific tools. Instead of paying the full amount upfront, financing companies help spread out the payments, allowing you to maintain a positive cash flow.
Industries that rely heavily on equipment, such as medical, construction, agriculture, transportation, restaurants, and hotels, can benefit significantly from equipment financing. Compared to other loan options, qualifying for equipment financing is relatively easy because the equipment you intend to purchase serves as collateral for the loan.
Loan Amounts
$25,000 – $5,000,000
Rates
Starting at 5.99%
Speed
24 - 48 Hours
How Equipment Financing Works
Equipment financing works by providing you with the funds to purchase or lease the equipment you need. The equipment itself serves as collateral for the loan, so there's no need to put any other personal or business assets at risk. If you are unable to repay the loan, the lender will repossess the equipment to cover the outstanding balance. However, as long as you make timely repayments, you can continue to use the equipment until the lease or repayment term ends.
What Are The Best Industries for Equipment Business Loans?
Transportation
Transportation companies rely on high-cost vehicles and machinery to keep their operations running smoothly. Equipment financing helps preserve cash flow by breaking down large upfront costs into manageable payments. With a financing plan, transportation businesses can allocate working capital toward other critical expenses while still acquiring the necessary equipment to expand or maintain their fleet.
Medical Practices
Medical practices require state-of-the-art equipment to deliver top-notch care. Equipment financing offers these businesses flexibility, allowing them to purchase essential tools without depleting their capital. By spreading payments over time, medical practices can upgrade equipment as needed while simultaneously generating revenue to meet financing terms. This ensures the practice stays current without financial strain.
Construction
In construction, the right equipment is crucial for completing projects efficiently and on time. Equipment financing allows construction companies to manage costs by spreading out payments rather than facing hefty upfront expenses. This type of financing supports companies in preserving working capital, ensuring they have the cash flow needed to fund day-to-day operations while still acquiring the equipment necessary to stay competitive.
Farming
Farmers often face significant upfront costs for machinery that is essential to running their operations. Equipment financing provides a solution, enabling farmers to invest in equipment without draining their savings. Financing options allow for tailored payment plans that suit the seasonal nature of farming income, ensuring that farmers can acquire the tools they need while maintaining financial stability.
Manufacturing
Manufacturing businesses depend on specialized equipment to remain productive and competitive. Equipment financing offers the flexibility to invest in machinery while keeping cash flow healthy. A metalworking equipment line of credit or plastics industry equipment line of credit helps manufacturers spread the costs of expensive machinery over time, allowing them to stay ahead of industry trends and technological advancements without financial pressure. This preserves capital for other operational needs, such as workforce expansion or inventory.
Restaurants and Hotels
The hospitality industry requires constant equipment updates to meet customer expectations and maintain efficient operations. Restaurant owners need to invest in commercial-grade appliances, while hotel operators often face costs for laundry, kitchen, or HVAC systems. Equipment financing enables businesses to upgrade or replace these expensive items without depleting cash reserves. With flexible terms, hospitality businesses can focus on growth and customer satisfaction while handling equipment costs over time.
Ready to apply for Equipment Financing?
What is the Difference Between Equipment Financing and Equipment Leasing?
Equipment Financing
An equipment financing or an equipment loan is a lump sum of money that a business owner borrows from a lender.
Like any traditional term loan, the lender and borrower will set up the terms reflected in the equipment financing agreement. Lenders and borrowers will negotiate the best equipment loan rates and length of its terms to purchase the equipment you need, and the loan is paid back like any other loan (i.e., a weekly or monthly payment). Spreading out the payments over the length of the term eases the burden of large purchases. At the end of the period, the borrower will own the equipment.
Equipment Leasing
Equipment leasing works similarly to a mortgage or a traditional car lease.
Essentially, your small business is renting the equipment from a lending company while making monthly payments over the lease terms. You and the lender negotiate terms and set up monthly payments for the equipment that your business needs and determine a set length of time.
Once the lease term ends, there are generally three options: terminate the terms of the lease and return the equipment, extend the terms and keep making monthly payments, or buy the equipment outright from the lender at a fair market value.
Pros and Cons of Equipment Financing
Pros
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Purchase, Lease, or Repair Business Equipment
The main benefit of small business equipment financing is that you’ll have the resources you need to purchase, lease, or repair your equipment on your business. You don’t have to wait for months to repair faulty equipment or make the necessary upgrade. You can improve your bottom line and cater to more customers with the right equipment.
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No Need to Submit Personal Assets or Additional Collateral
One difference between equipment loans and traditional loans is that the equipment itself is used as collateral to secure financing. It is one benefit that small business equipment financing provides proprietors, as the emphasis for the lender is more on the value of the equipment over time than the borrower’s credit history. This also means some lenders may not require a down payment from the business. Even if a down payment is necessary, the amount isn’t usually as significant as other options.
This feature makes the qualification easier for small businesses and allows SMEs to obtain the expensive equipment needed to get the job done.
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Spread Equipment Payments
Maintaining positive business cash flow is a constant concern for small business owners. Purchasing equipment upfront can only complicate your cash flow. Taking out an equipment loan or lease allows you to spread the cost of the equipment, so you’ll be able to allocate a fixed amount every month and budget your expenses.
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Tax Benefits
Equipment financing and leasing are two popular options for businesses to acquire the necessary equipment. However, there are differences in how they affect taxes.
With an equipment loan, you make payments throughout the loan term and pay interest to the lender at the agreed-upon equipment financing rates. While the interest paid on the loan payments can be written off as tax-deductible, the total principal payment cannot be written off.
On the other hand, with most equipment leasing programs, you can write off the entire lease payment as a business expense. This means that the entire amount paid for the equipment can be written off by deducting the monthly lease payments. Additionally, there are government incentives written into the tax code that offer significant tax benefits for leasing. For instance, under Section 179 of the IRS Tax Code, the full amount of equipment purchases can be written off if an equipment lease is set up. Even if you do not pay the entire amount for the equipment financing rates in the year you are filing taxes, you can deduct the entire amount from your taxes for that year.
To take advantage of these tax benefits, we recommend forming a strong relationship with your tax professional and doing research when choosing the right lender for your financing needs. By working closely with lenders and tax professionals, you can ensure that you get the most out of the tax benefits that equipment finance companies can offer.
Cons
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Equipment Might Become Obsolete
If you opt for leasing, the equipment might become obsolete by the time you fully repay the loan. Additionally, you won’t own the equipment until you’ve repaid the loan. This is something to consider, especially if you’re planning to purchase the equipment.
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Restricted Use of Funds
Equipment financing can only be used to finance equipment purchases or leases. If you need to fund other expenses, like day-to-day costs, utilities, or payroll, you’re better off exploring other options.
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Down Payment May Be Required
In some cases, you may need to pay 10% to 25% of the total equipment cost. You may not be able to qualify if you don’t have cash for the down payment. However, some lenders are willing to fund 100% of the equipment value.
What are the Requirements for Equipment Financing
Remember that the requirements may vary depending on the lender you’re working with.
If you apply through SMB Compass, here are the requirements you need to prepare:
3 months’ worth of bank statements
Invoice of equipment
At least 2 years in business
How to Apply for Equipment Financing
Fill out our online application form. It’s free, and it won’t affect your credit score.
After reviewing your application, we’ll reach out to you to discuss your equipment financing options.
Receive loan offers from our partners and fund your business.
How Long is the Underwriting Process for Equipment Financing?
Applying for small business equipment loans is faster when the equipment costs under $200,000. If this is the case, the application and closing process can be completed within 24 to 48 hours.
“Small-ticket” commercial equipment loan decisions are heavily driven by the equipment type and the credit quality of the business owners. With strong personal credit, an established business history, and financing high residual equipment, you can expect the application process to take just 24-48 hours.
Lenders may ask for more financial information if the equipment costs more than $200,000. The process can take anywhere from 7 to 14 days since a more thorough underwriting process is needed to obtain the best equipment loan amount and rates for approval.
Equipment loans are usually readily available through an online lender, bank, or credit union. Every lender will have varying requirements for their equipment loans, so be sure to browse the potential options available for your business.
Equipment Financing Alternatives
If you need money to fund other expenses aside from equipment, here are some alternatives you should check out:
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Business Line of Credit
A business line of credit is an excellent option for businesses looking for flexibility in financing. Once approved, you’ll receive a credit limit from the lender, and you can withdraw from it anytime without exceeding the limit. You only have to repay the money you’ve withdrawn (plus interest) – not the entire credit limit.
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Invoice Financing
Check out invoice financing if your business is experiencing cash flow issues due to unpaid invoices. This financing allows you to use pending invoices as collateral in exchange for immediate funding.
Lenders generally advance 80% to 90% of the total invoice value, and you’ll receive the remaining percentage (minus lender fees) once your customer pays their dues.
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Business Term Loans
A business term loan is your traditional business loan where you receive a lump sum of money you need to repay in fixed installments over a specified period. Many business owners prefer term loans because they’re straightforward, and you can use the funds for almost any business purpose.
Ready to apply for Equipment Financing?
