Alternatives to equipment loans

Compared to other types of business loans, equipment loan interest rates tend to be lower. They are a good tool for businesses that want to repay their loan in set monthly payments.

But equipment loans are not the right choice for every business. You may qualify for better rates with a term loan if you have great credit. Some lenders may require you to have at least two years in business or meet a hefty minimum down payment. Because of this, term loans, lines of credit and SBA loans are all valid options. And depending on your business, you may even consider leasing rather than financing to get the equipment you need.

Here’s a closer look at common equipment financing alternatives.

Alternative equipment financing options

Term loan

Term loans are one of the most common and flexible alternatives to equipment loans. 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 and semi-trucks. You can borrow from a bank, credit union or online lender, and the lump sum can be used to purchase equipment.

They may be your go-to alternative if you don’t have a down payment, which many equipment loans require. Just be aware of the fees lenders charge in addition to interest. Since term loans can be unsecured, your interest rates may be higher.

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 expenses 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.

Equipment leasing

Equipment leasing allows you to rent equipment rather than buy it directly. This means a lower 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 a tax credit. And for tax purposes, you are considered the asset’s owner for the lease’s duration.

Business credit cards

Business credit cards operate like personal credit cards. Your company will be approved for a set credit limit, and you charge purchases to it as needed. You’ll only pay interest on the current balance.

A business credit card may have a higher interest rate than traditional business loans, and the rates are 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.

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. That said, crowdfunding sites like Kickstarter require you to meet your campaign goal within the designated timeframe to receive the funds. Crowdfunding is best for businesses that don’t need financing fast and are okay with the possibility of not receiving it.

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. 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.

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. But a bank loan can be difficult to qualify for, especially if you are a startup or don’t have sufficient revenue. That being said, banks offer the most competitive rates 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.

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 they are member-owned, it may also 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 have fast loan options, including business loans for bad credit. Many fintech lenders offer strong alternatives to equipment loans. Term loans, lines of credit and other forms of financing are all available. And in almost every case, the entire process, from application to funding, takes place online in a matter of days.

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 business loans for startups — that can cover equipment.

The application process can be tedious depending on the lender you work with, so be prepared to outline your needs and why this equipment is necessary. 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. It allows your business to be flexible and sometimes avoid expensive maintenance as the equipment gets older. But if your business needs to use the equipment consistently, and you know it will last a long time, purchasing it will be the better route.

• 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 business owners who want to build credit and rack up a positive payment history. But if your business can handle a large down payment or an outright purchase, paying cash for equipment will result in lower overall costs. After all, paying cash means avoiding interest, which can benefit your bottom line.

• What is the average interest rate on equipment loans?

  The business loan interest rates start at 5.5 percent for loans from banks and 6 percent for online lenders, but those rates are reserved for borrowers with excellent credit and strong business financials. If you have good credit, you may be able to qualify for an equipment loan with interest rates between 8 percent and 16 percent. But borrowers with bad credit will likely see rates of 25 percent or higher. Keep in mind that 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.