Small Business Equipment Financing Guide

Equipment can make or break your small business. You might need computers or copiers, machinery, or vehicles to run your operations. But how can the average business owner afford the often expensive up-front costs for equipment? That’s where outside funding comes in. Although the thought of “debt” can cause anxiety about cash flow and meeting other financial obligations, getting the right loan at the right time can be the correct path for you. Here’s what you need to know about financing equipment for your business.

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What is an Equipment Loan?

As the name suggests, an equipment loan is a form of small business financing that is used specifically for equipment purchases. If you don’t want to or are financially unable to purchase an item upfront, you can use the funds from the loan to expense the cost and then repay the principal over a longer period of time. This allows you to break up the cost into more manageable payments. Equipment can be computers, machinery, cars, desks or other goods that help you run your business.

Reasons to Get a Business Equipment Loan

Take a look at your business plan and evaluate business operations. Here are several reasons a business owner might consider an equipment loan:

  • To replace old equipment
  • To update older or out of date equipment
  • To add to your existing equipment inventory
  • To increase product production

Equipment Loan vs. Lease

When you lease equipment, you don’t own it. Instead, a lender buys the equipment from a vendor and then rents to you. Typically, when the lease period ends, you can purchase the equipment, renew your lease, or return the equipment.

Types of equipment leases include operating leases and capital leases:

Operating leases – Also called a fair market value lease, this type of lease allows the lessee to use the equipment for a certain agreed upon time period for a fixed monthly payment.

Capital leases – This type of lease is similar to a loan but doesn’t appear on your balance sheet during the term of the lease. At the end of the lease, the business owner has the option to buy the equipment for a nominal price. A $1 buyout lease and 10% option lease are one example.

How Equipment Loans Work

Like many other loans, you’ll receive a lump sum of money in your business account from the lender 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.

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

Unlike an equipment lease, you’ll have the opportunity at the end of the loan term to purchase the equipment. Once you repay the loan, the equipment belongs to you.


How to Prepare for an Equipment Loan

Here are steps to make sure an equipment loan is the right choice and how to prepare to apply.

1. Determine if an equipment loan is the right fit for your needs.

Review the pros and cons of leasing or buying equipment so you can make an informed decision.

2. Review your business plan

A business plan is basically a road map to show you how to reach your goals. It’s a “living document” and should be reviewed and updated regularly as your business evolves.

3. Check your credit

Lenders typically review your business and personal credit reports. Make sure there are no discrepancies and have mistakes corrected ASAP. If you’re scores aren’t quite there, review our blog post for helpful tips to improve them: Ways That You Can Help Improve Business Credit Score.

4. Choose a lender

There are thousands of options for small business owners seeking funding. Read reviews from real customers to determine if strong support is available. Check rates and fees as well so you’ll know the true cost of your loan.

5. Prepare documentation

Of course, lenders want to know that you can make full payments for the life of the equipment loan. Before you get started, have the required paperwork organized. You’ll save lots of time and effort. Upload credit reports, business plans if required, proof of ownership, cash flow statements, a balance sheet, tax returns, bank statements, insurance policies, and any required business licenses.

The bottom line

Did you know that SBA loans can be used toward equipment purchases as well as marketing, hiring, and debt refinance? With low rates, long terms, and low monthly payments, you can boost your business growth not only through an equipment loan but by increasing available working capital.

If you’re looking for an affordable, secure option, SBA loans can be a great fit for your business. SmartBiz Loans  makes it easy to apply through our streamlined, online application. We match you with the lending partner who’s most likely to fund your loan. About 90% of qualified applications we refer to banks get funded.

Get started today by pre-qualifying in under 5 minutes with no impact on your credit score.*

* SmartBiz Loans conducts a soft credit pull that will not affect your credit score. However, in processing your loan application, the lenders with whom we work will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and happens after your application is in the funding process and matched with a lender who is likely to fund your loan.