Equipment Loans for Small Business: Pros & Cons

Every business needs equipment to operate. You might require computers for the office, manufacturing machinery, or vehicles. But buying equipment outright for cash can be extremely costly. If you’re looking to boost your business growth by purchasing new or used equipment, an equipment loan may be the financing option for you.

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What is a Business Equipment Loan?

A business equipment loan is specifically made for the purpose of buying equipment for your business. Equipment can be computers, machinery, cars, desks, or other goods that help you run your business. Rather than paying the full cost of the supplies upfront, an equipment loan helps spread out the payments into smaller increments, protecting your cash flow, and keeping your debt load manageable.

How Equipment Loans Work

An equipment loan is just that – a loan. You’ll receive a lump sum in your business account that requires repayment on a regular basis, typically monthly. The cost of borrowing funds will depend on the amount, APR, and term length. To determine your monthly payment, you’ll need to be clear on all associated rates, fees, and obligations, so a loan calculator can come in handy to help you crunch the numbers.

Many times, the piece of equipment will act as the collateral and secure the loan but be sure to check with your lender about specific application requirements.

Unlike an equipment lease, at the end of your loan, you’ll have the opportunity to purchase the equipment. Once you repay the loan in full, the equipment is yours to keep. For equipment that will last your business an extended period of time, an equipment loan could be a great option to consider.

Leasing vs. Loan

The difference between an equipment lease and an equipment loan is whether you have to return the equipment after the loan is paid off. While a loan allows you to purchase and fully own the piece of equipment, a lease implies that you’re only using the product for a certain amount of time. After the lease expires, you can only keep the product if you pay a sum specified by the company.

Uses of Proceeds

Wondering how you can apply your equipment loan to your business? Some common uses of proceeds are to replace old equipment, to update older or outdated equipment, and to add to your existing equipment inventory. Usually, these loans are intended for large purchases that don’t depreciate too quickly. For example, you can purchase trucks, computer servers, machinery, or other large-scale equipment.

Pros and Cons

If you’re considering an equipment loan, review these pros and cons to determine what course of action is right for your business.

Pros

Equipment loans are specifically made for the purchase of a certain item, so they can be quicker and easier to obtain than a traditional term loan, which can be more multi-purpose. Equipment loans can be taken out for amounts as large as 100% of the equipment’s value, and the term is determined by how long the equipment will be used. Because the piece of equipment serves as collateral for the loan, it can sometimes be easier to apply and get approved.

Cons

Consider that taking out an equipment loan might cause more harm than good if interest costs more than the equipment is bringing in. At the end of the day, the trade-off between saving up to make a purchase and moving forward with a loan will depend on how much value the equipment brings your business.

Eligibility Requirements

Most business are eligible for an equipment loan, but the terms and rates will depend on the cost of the equipment, your business finances, and your credit score.

Some commonly requested documents are bank statements, an invoice for the equipment, and tax returns. You’ll also need to demonstrate that you have enough annual revenue to factor in the loan payments, and that the equipment will boost your business cash flow.

A down payment typically in the 10-20% range may also usually be required as another way to show that you’ll be able to pay back the loan amount. The riskier the loan is, the higher the down payment may go.

How to Apply for an Equipment Loan

1. Understand your equipment needs and financial situation

Lenders will usually ask a few basic questions including why you need the equipment, how it could it impact your revenues, profits, and overall business, and can you make timely payments for the life of the loan? By knowing the answer to these questions, you’ll be more prepared to discuss your options with an equipment lender.

2. Determine if you qualify

Review the eligibility requirements of the lenders you are considering. These will vary so ensure that you meet the basic prerequisites before you spend time and effort applying. Common criteria include:

  • Credit scores: Typically, you’ll need a score of at least 550 to qualify for an equipment loan, although many lenders prefer scores of 660 or higher. Read more about credit scores on the SmartBiz Small Business Blog: Understanding Credit Scores.
  • Time in business: Some lenders will only provide financing to businesses that have been established for a certain number of years.
  • Revenue: You may be required to show revenue numbers to determine if your business is generating a specified amount of income.
  • Loan amount: Determine if you want to finance all or part of an equipment purchase.
  • Preferred repayment terms: Generally, longer terms mean lower monthly payments.

4. Research lenders

If you’re looking for an equipment loan, you can go directly to the dealer where you’re buying the equipment, to your local bank, to a company specializing in equipment loans, or to an SBA lender. For large purchases, an SBA loan’s low rates and long terms can be the most affordable option.

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Types of equipment financing

Traditional equipment loans

For an equipment loan, the equipment acts as collateral and it’s possible to get 100% financing, although a 20% down payment may be required by some lenders. Terms can be as short as 36 months or can stretch out over a period of 10 years or more, based on loan amount. Equipment loans can be funded fairly quickly, often in as little as two business days.

Bank term loans

Term loans are another option for small business owners in need of quick access to cash for an equipment purchase. Term loans are repaid over a set period of time similar to a mortgage or car loan. A Bank Term loan from lenders in the SmartBiz network is a short-term, fixed-rate loan with stable monthly payments. These loans are a great fit when you need funds quickly and want to lock in your interest rate for an equipment purchase. Details of a Bank Term loan from banks in the SmartBiz network include:

  • $30,000 to $500,000 loan amounts
  • 2 – 5 year repayment terms
  • Fixed interest rate from 7.99% to 24.99%*
  • Monthly repayments
  • No prepayment penalties

*Interest rate depends on loan term and the applicant's credit and financial profile.

Business credit card

Business credit cards have a set credit limit and allow you to make purchases and withdraw cash. Like a consumer credit card, a small business credit card carries an interest charge if the balance is not repaid in full each billing cycle. You can get approved for a credit card through a bank. Research card terms and features online so you can find the best fit for your equipment purchases. Business cards typically carry credit limits of $50,000 or more. This makes it much easier to purchase high dollar equipment you need to run your business efficiently.

Line of credit

Instead of a lump sum of borrowed money, a business line of credit is a revolving line you can draw against as you need it. You only pay for the money that you use. When you repay a borrowed amount, those funds are immediately available again.

It’s possible to obtain a line of credit of up to $1 million if you own an established business that has a solid track record and you’ve got an outstanding credit score. However, rates can go up to 36%, making your equipment more expensive over time. Business lines of credit are designed to be used in the short-term to cover temporary cash flow gaps rather than large, one-time expenses.

SBA 7(a) loan

SBA 7(a) loans are known as the “gold standard” in small business funding and can help you meet your goals. An SBA 7(a) loan has several advantages compared to other equipment funding options including:

  • Low interest rates
  • Long terms
  • Very low monthly payments
  • Available for many uses
  • Can help build business credit
  • No prepayment penalty

Because SmartBiz works with multiple banks, we match you with the lender most likely aligned with the use of SBA loan proceeds you are seeking. Don't waste time going from bank to bank to find the right fit—our financial professionals are on hand to help you through our streamlined process. An SBA loan from a bank in the SmartBiz network is a smart solution to help you get the equipment you need.

Requirements include:

  • 2+ years in business
  • Business owners must be U.S. citizens or legal permanent residents
  • Business owners’ personal credit score must be 650 or above
  • Business and personal cash flow to service all debt payments demonstrated by tax returns and interim financial data
  • No bankruptcies or foreclosures in the last 3 years
  • No outstanding tax liens
  • No delinquencies and/or default on government loans

Visit the SmartBiz Loans website here for in-depth information: SBA loans: What You Need to Know.

Business stories

SmartBiz works with thousands of small business owners across America to help them get the funds they need. Meet two customers who are growing their business by using an SBA 7(a) loan for smart equipment purchases.

The Tree Guy is Ready to Grow

Randy Jacques secured an SBA loan for $105,000. In addition to working capital, he was able to use funds for equipment that will help him run his business more efficiently. “I leased a wood chipper along with additional smaller tools. Now we’ll have less downtime during jobs.”

Terry Trumbull Wholesale Meats

Business owner Terry Trumbull needed additional funding to grow his meat delivery service. He had self-financed his business for years but looked to alternative sources for funds. He took out a low-cost SBA loan for a new refrigerated truck to answer demand when the economy was suffering and more people were cooking at home.

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