Alternatives to equipment loans

Equipment loans are a good tool for businesses that want to back the loan with the equipment in order to secure low rates. But these loans are not the right choice for every business.

You may qualify for better rates with an unsecured term loan if you have great credit, allowing you to get funding without putting up collateral. Or you may decide to go with equipment leasing to allow you to lease the most up-to-date equipment.

There are many reasons why you might choose an alternative type of financing to an equipment loan. The features of a different loan may help you secure the financing you need more than an equipment loan might. Let’s explore different equipment financing alternatives and their features to find the right loan for you.

Alternative equipment financing options

Term loan

Term loans work similarly to equipment loans in that they give you a lump sum to use, and you repay with interest within a specified term. But you don’t have to back the loan with the equipment — you can use other assets or choose an unsecured loan.

They are available from various lenders and can be used to purchase any business-related expenses. This includes equipment purchases, such as restaurant or office equipment or semi-trucks.

You can borrow from a bank, credit union or online lender. Online lenders tend to have more lenient requirements to apply and fast funding within 24 to 48 hours, while banks and credit unions have strict requirements but offer the best interest rates. Be aware of the fees lenders charge in addition to interest. Since term loans can be unsecured, your interest rates may be higher than an equipment loan.

Equipment line of credit

Like other business lines of credit and business credit cards, an equipment line of credit gives you a set credit limit that you can draw from as needed. You only pay interest on the amount you spend, and your limit is replenished as you pay back your line. And because it is secured by collateral, you may qualify for a lower interest rate than you would on an unsecured line.

But your funding will be restricted to equipment. You can’t draw from an equipment line of credit for other day-to-day business expenses. This makes it significantly less flexible than a line of credit that does not require collateral. So, if you’re looking to buy equipment and cover other expenses, you may want to consider an unsecured business line of credit instead.

SBA loans

If you have exhausted other forms of financing, the Small Business Administration (SBA) has a handful of government-backed small business loans that can be used for equipment.

• 7(a) loans. The standard option, a 7(a) loan, is a term loan that can be used to cover many business-related expenses.
• 504 loans. A 504 loan is the most similar to an equipment loan. They are intended for most major fixed assets that grow your business, including equipment.
• Microloans. The SBA Microloan program is for businesses looking for smaller funding amounts. The maximum microloan amount is $50,000, so it’s a good fit for inexpensive equipment and small purchases.

Overall, SBA loans have competitive rates but may take longer to apply for and fund than other alternatives you may be considering — as long as 30 to 90 days. You can apply for SBA loans through SBA-approved lenders and nonprofits offering the different types of SBA loans. SBA Preferred Lenders like Bank of America can also expedite the loan approval process since they don’t have to get direct SBA approval.

Equipment leasing

Equipment leasing allows you to rent equipment rather than buy it directly, offering a low upfront cost and low monthly payments. And lower monthly payments mean you may reduce your risk of default.

There are two options for leasing equipment: operating and capital leases.

• Operating leases.An operating lease does not transfer any ownership of the equipment. Instead, your business uses it for the duration of the lease and returns it at the end of the lease period. This short-term option leads to lower payments and can help give your business access to expensive equipment it might not otherwise be able to afford.
• Capital leases. A capital lease allows your business to purchase the equipment at the end of the lease period. Unlike an operating lease, you can claim both the depreciation and interest as tax deductions. And for tax purposes, you are considered the asset’s owner for the lease’s duration.

Business credit cards

Business credit cards allow your company to be approved for a set credit limit, and you charge purchases to it as needed. You’ll only pay interest on the current balance. As you pay back the current balance, your credit limit resets, allowing you to borrow again as needed up to the limit.

A business credit card may have a higher interest rate than traditional business loans, such as an 18 percent to 35 percent APR. The rates are also variable, so they may change at any time. Business credit cards may come with perks, such as cashback, travel rewards or a 0 percent APR interest offer. And if you pay the balance in full each month, you’ll receive a grace period of at least 21 days in which you can pay back the amount you borrowed, interest free.

Crowdfunding

Crowdfunding is a way for businesses to raise money. There are a few types of crowdfunding, including donation, reward and equity. With donation-based crowdfunding, you don’t have to repay any donations, making it a great alternative to equipment financing. With reward or equity crowdfunding, you reward the investors with your product, swag or even part-ownership (equity) in your business.

However, to reach your goal with crowdfunding, you’ll need a strong personal network or crowdfunding community that is interested in your business. Some crowdfunding platforms like Kickstarter won’t give you any funds unless you reach your fundraising goal. Since you’ll need to build awareness and buzz around your brand, this type of financing doesn’t work well if you’re looking for a hands-off form of financing.

Angel investors

Angel investors are private investors who are willing to take on riskier bets. In exchange for their investment, they usually ask for equity in the business and may want say in how the business is run. If your business fails, they risk losing their entire investment. If you succeed, they will maintain part ownership of the company per the terms of the contract.

While an angel investor may offer decent terms and an appealing opportunity, be mindful of how much equity you’re giving up. The upside is that you can get a business partner with experience in the market who will offer you mentorship to make your business succeed.

Where to find alternatives to equipment loans

Because most business loans can be used to fund equipment, you have options. Banks, credit unions and fintech lenders all have equipment loan alternatives.

Banks and credit unions

Banks are the traditional option for business loans. They offer the most competitive rates among lenders and frequently work with the SBA to offer loans to small businesses. You should be able to find term loans and affordable lines of credit at most major national and local banks.

But a bank loan can be difficult to qualify for, especially if you are a startup or don’t have sufficient revenue. Keep in mind that you will likely need strong credit such as 670 or higher and revenue between $150,000 to $250,000 to qualify.

If you already bank with a credit union, you may qualify for one of its loan options. Like banks, credit unions can offer competitive rates. Because you have already built a relationship with the credit union as a member, it may be easier to qualify for one of their equipment loan alternatives than a business loan from a bank.

Fintech lenders

Fintech lenders operate solely online and work well if you need fast funding to cover an emergency or take advantage of a time-sensitive opportunity. They often fund within 24 to 48 hours.

They also offer business loans to borrowers with bad credit. While bank lenders want to see good to strong credit, online lenders tend to set the requirement around 600, and some go as low as 500. This requirement makes online lenders more accessible to a wide variety of credit risks.

Online lenders may specialize in a few business loans, like lines of credit or short-term loans. Some will offer a variety of business loans and alternative forms of financing that bank lenders don’t offer, such as merchant cash advances and invoice financing. You’ll need to compare lenders to find the best option for you.

Bottom line

Your business doesn’t need to rely solely on an equipment loan to make a purchase. There are a variety of equipment financing options available — including term loans, lines of credit, equipment leasing and SBA loans — that can cover equipment. Whichever option you choose, take the time to compare the best small business loans for you and reach out to multiple lenders for quotes.

Frequently asked questions

• Is it better to buy or lease equipment?

  Leasing equipment is an accessible option for business owners who may not qualify for business loans or have enough money saved for a sizable down payment. It’s also a good choice for businesses in industries that frequently see improvements in technology. But if your business will use the equipment for a long time and doesn’t need the newest equipment, you may want to purchase to own the asset.

• Is it better to finance or pay cash for equipment?

  It depends on the goals and overall cash flow of your business. Financing equipment is a better option for businesses that can’t afford the sizable upfront costs needed to purchase equipment or that would like to keep capital on hand. But if your business can handle paying the entire cost up front, paying cash for equipment will result in lower overall costs since you’ll avoid paying interest.

• What is the average interest rate on equipment loans?

  The business loan interest rates start at 7.00 percent for loans from banks and 9.00 percent for online lenders, but those rates are reserved for borrowers with excellent credit and strong business financials. If you have fair or bad credit, you could see rates as high as 99 percent. Interest rates on any business loan vary considerably based on several factors, including the amount of time you’ve been in business and your cash flow.