How to get an equipment loan

Equipment loans are a good resource when your business needs equipment it can’t buy outright. Equipment loans are backed by the equipment as collateral, helping you get approved for funding and possibly leading to lower loan interest rates.

When getting equipment financing, you’ll need to choose from an equipment loan or lease, depending on whether you want to own the equipment or need the most up-to-date equipment for your business. Then, you’ll need to assess the lender, including its qualifications to apply, and the loan features such as its terms and fees. Follow these steps to get an equipment loan that works best for your situation.

What is an equipment loan?

An equipment loan is a small business loan you can use to help fund equipment for a business. Small business equipment loans work similarly to any other business loan, and they are offered by many types of lenders. You can use the loan to buy, repair or replace equipment.

Business equipment is any tangible asset that you use for your business. This includes company vehicles, machinery, computers and furniture. It also includes any equipment you might need when you’re just opening the business, though it can be difficult to find startup loans.

How to get equipment financing

When getting equipment financing, you can find a variety of lenders that offer both loans and leases. Consider the type of financing you need while comparing multiple lenders to find the most cost-effective option.

1. Know what kind of equipment you want and its cost

When you apply for a loan, the lender will want to know what equipment you plan to buy and how much it costs. This helps them understand the loan amount. It also gives them information on the specific equipment that will act as collateral for your loan. The lender may want a quote from an equipment vendor to verify the equipment cost as you’re applying for the equipment loan.

Before you apply for an equipment loan, make sure you understand the full loan amount and the monthly payments. Use a business loan calculator to get an idea of your potential monthly payment. Then, you can see whether you can easily manage the equipment loan cost within your business budget.

2. Decide between an equipment loan and an equipment lease

There are three main options for financing business equipment: loans, leases and sale-leasebacks.

Small business equipment loans are a good option if you want to own the equipment outright. But they may require a down payment of 10 percent to 20 percent to get the loan. If you can’t swing a down payment, you’ll need to find equipment lenders that offer 100 percent financing with no down payment requirement.

On the other hand, equipment leasing doesn’t usually require a down payment. This option works well if your business equipment becomes obsolete quickly. You won’t have to worry about selling outdated equipment and can move on to leasing more up-to-date equipment when your lease is done. However, you don’t own the equipment unless you opt to purchase it at the end of your lease. Think of equipment leasing as long-term renting.

Sale-leasebacks work differently. If your business has money tied up in its equipment, you may be able to sell it and then lease it from the purchaser. While you will have a monthly payment, your business can use the sale money as working capital.

Here are the key differences:

3. Assess your qualifications

When it comes to equipment financing, lenders will typically look at the length of time you’ve been in business, your business credit score and annual revenue to decide if you qualify.

Online lenders will typically have more lenient requirements than banks or credit unions. However, traditional lenders tend to offer the best interest rates and repayment terms. Typical qualifications to get a small business equipment loan:

• Time in business: At least two years in business is the standard requirement, although you may be able to qualify for a startup equipment loan. Some online lenders consider businesses as young as six months.
• Credit score: Your personal and business credit score will also play a big role in your eligibility. Many lenders will want to see that each owner has fair credit — at minimum. It may also consider your business credit score if your business has previously taken on debt.
• Annual revenue: A bank will typically require a higher annual revenue than online lenders, such as $150,000 to $250,000. But even the most lenient online lender, Funding Circle, has a minimum annual revenue requirement set at $50,000 for its equipment loans.

4. Seek lenders that match your qualifications and needs

Both traditional lenders — like banks and credit unions — and online lenders offer small business equipment loans. There are even lenders that specialize in equipment loans, such as TAB Bank and Triton Capital. In many cases, lenders offer large loans with long terms to fund larger equipment expenses.

Research several options and look for lenders that best fit your needs, such as:

This is not a definitive list. Check local banks and credit unions in addition to nationally available options to find a lender that fits your business’s needs.

5. Compare lenders and loans

Once you’ve found some lenders with loan options you likely qualify for, compare your options. The right lender may differ for each business. If the lender offers a way to prequalify with a soft credit pull, use it. This will let you compare rates and amounts without hurting your credit score.

There are several factors to consider when comparing equipment loans. Consider interest rates, fees, down payments and other factors to compare each lender’s options. Take in the full picture of the loan costs and how the payments will impact your business.

• Loan amount: The loan amount varies by lender, but expect it to cover between 80 and 100 percent of the equipment’s cost.
• Down payment: An equipment loan may require a down payment between 10 and 20 percent.
• Interest rate: Both your business’s creditworthiness and current market forces impact business loan interest rates. Rates can range from the single digits to well over 30 percent.
• Repayment terms: Repayment terms typically range from six months to five years, though some lenders offer longer terms. Some lenders may offer multiple payment frequency options, such as monthly, quarterly, semi-annual or annual payments.
• Fees: Common business loan fees include administrative fees, application fees, late fees and origination fees. Some fees are flat, but others may equal a percentage of the loan amount, potentially tacking on thousands in added costs.
• Payment reporting: Equipment loans can help you build your business credit score. Confirm with each lender if payments are reported to any credit bureaus, such as Dun & Bradstreet, Equifax or Experian.
• Pre-approval period: Lenders may give you a bit of time to shop around and find the best deal on your equipment.

Take in the full picture of the loan costs and how the payments will impact your business. Consider interest rates, fees, down payments and other factors to compare each lender’s options.

6. Gather documents and apply

When you are ready to apply, take your time to prepare your loan application and the required documents. You will typically need to provide documents that provide business financial information and prove your business exists. Typical documents include:

• Business license and registration
• Business plan
• Business bank statements from the past year
• Business tax returns from the past three years
• Current financial statements, such as accounts receivable, balance sheet and income statement

Understand the specific requirements of your lender to help you gather exactly what you need.

Bottom line

Getting an equipment loan can help you build your business and produce your products or services without having to use up all your capital on hand. You’ll need to research a variety of lenders to find the best rates and to see whether your business matches their qualifications.

Consider the type of loan or lease you need and which lender offers you the best loan terms. You can typically find small business equipment loans with high loan amounts and long or flexible repayment terms, such as offering semi-annual or annual payments. Having these repayment terms helps you effectively manage the equipment loan repayments.

Frequently asked questions

• How hard is it to get a loan for equipment?

  Equipment loans tend to be easier to get than other types of business loans. Many lenders offer relaxed qualifications since the equipment itself secures the loan with collateral. If you exceed the minimum requirements set by your lender, you’ll have a higher chance of approval. However, this is not a guarantee, as there are many factors that go into getting a business loan.
  

• What type of equipment can I use an equipment loan for?

  Business equipment includes any asset you use for your business, such as company vehicles, machinery, computers and furniture.

• How do I know if I qualify for an equipment loan?

  Check with each lender you want to apply with. Lenders typically look at the length of time you’ve been in business, your business credit score and business revenue to decide if you qualify. The qualifications vary from lender to lender. Many lenders allow you to prequalify, allowing you to see whether you might qualify for their equipment loan without a hard check on your credit.

• What are the differences between an equipment loan and an equipment lease?

  An equipment loan is a good option for equipment you plan on keeping for a long time. Depending on the lender, an equipment loan may require a down payment of 10 to 20 percent, but you own the equipment as soon as the purchase is made. With an equipment lease, monthly payments are typically smaller than loan payments. Plus, no down payment is usually required, but you don’t own the equipment unless you opt to purchase it at the end of your lease.