Growing your business / Resources

A Complete Guide to Business Equipment Loans: Requirements, Benefits and Tips

By: Kate Samano December 27, 2021

Running a business can be expensive in many ways. While rent, inventory and employee costs tend to be the biggest expenses, another immense cost is business equipment. Business equipment typically has a considerable upfront cost, but it's also something you can't go without. You need the new equipment to continue operations, expand your business or improve your current services. Instead of dipping into their cash reserve to pay for this equipment, most business owners look for business equipment loans.

It’s quite common for businesses to turn to financing when they need sizable new equipment. According to the Equipment Leasing and Financing Institution, almost eight in 10 American companies use some form of financing when acquiring equipment, whether in the form of loans, leases or lines of credit.

However, if you’ve never taken out a business equipment loan before, it can be confusing to know where to start. This guide walks you through everything, from the requirements and benefits of these loans to the tips and tricks you should know before you apply. 

What Is a Business Equipment Loan?

It’s essential to know exactly what a business equipment loan is. This type of loan allows you to finance the purchase of a piece of equipment for your organization. Unlike an equipment lease, you actually own the equipment and you’re in charge of its maintenance. 

Often, the equipment itself can be used as collateral for the loan, so you don’t have to pay a deposit. However, if you ever stop making your monthly payments, the lender will seize the equipment. 

There are dozens of equipment financing companies out there to choose from, as businesses in almost every industry need business equipment loans at some point. However, while getting approval for these loans may be more straightforward than for traditional business loans, they come with some restrictions. Most business equipment loans are strict in that you can only use the money to purchase equipment and nothing else. 

Business equipment financing companies typically lend between 80-100% of the total equipment cost, and loan terms are between three and seven years.

Requirement for a Business Equipment Loan

Equipment financing companies have different loan requirements, but some of the typical qualifications include:

  • A minimum amount of time in operation (such as 12 months)
  • A minimum credit score (usually 650 or higher)
  • A minimum in annual revenue (often $50,000 or above)

However, not all lenders require a minimum credit score. Lenders who don’t require a minimum credit score allow you to use the equipment as collateral to secure the loan, making credit less of a factor. 

Benefits of Business Equipment Loans

There are several benefits to business equipment loans, including:

Keeps Cash Flow Healthy

Even if your business had the capital to purchase the equipment upfront, paying for the equipment in cash usually isn’t the best strategic move. Companies need to have a healthy cash reserve to ensure they can handle any problems that may arise, such as slow periods, lawsuits, expansion, inventory and more. 

Fast Funding

Business equipment loans can usually be secured quite quickly, so you can get the equipment you need right away. Many companies can secure a loan within just a few days, which means you won’t have to spend months saving up for the purchase. You get your equipment quickly, and your business operations continue to run smoothly. 

Flexible Loan Terms

Generally speaking, business equipment loans come with much more flexible terms than conventional business loans. 

Helps Improve Your Credit

If you can manage to make your monthly payments on time and in full, your business equipment loan can actually help you build a healthy credit score. 

Business Tax Breaks

New equipment purchases are a business expense that can be written off under Section 179, including equipment purchased through a business equipment loan. This means qualifying equipment can be 100% written off in the year you purchase it, significantly lowering your company’s taxes. 

Three Tips for Using Your Business Equipment Loan

Here are some imperative tips and tricks every business owner should know before applying for a business equipment loan:

1. Consider the Equipment’s Lifespan

Your loan will likely last several years. In some industries, technology and equipment can get outdated within very short time frames. You want to ensure that your loan length doesn’t exceed the expected life of your equipment. Otherwise, you’ll have to upgrade to new equipment (with a new loan) while you still have your old outstanding loan.

Do your research and purchase durable equipment that will last a long time. If you need something that you know will require an upgrade in a few years, opt for a shorter loan term. 

2. Think Beyond the Typical

Most people hear business equipment and think of ovens for restaurants, delivery trucks, manufacturing equipment or construction equipment. While those are all valid and excellent purchases for a business equipment loan, it can be helpful to think beyond the typical equipment. 

Business equipment loans can be acquired for many things, including technology upgrades. You should consider technology equipment that can improve your operations for your employees and customers. For example, online appointment booking systems, tablets for employees and mobile point of sales (POS) systems can add value to your business and help improve operations. 

Another option is to consider using your business equipment loan to go green. You can consider upgrading to energy-efficient equipment, such as purchasing Energy Star equipment or switching employees from desktops to laptops, which use a lot less power. The benefits to going green include savings on utility costs and the ability to promote your business as energy conscious. Some states offer tax incentives for energy-conscious upgrades. 

3. Opt for One Loan

If you need multiple equipment purchases, combine them under one loan. To do this, you’ll need to provide your lender with one plan for all the equipment and get approved for all the items. 

You want a single loan for a few reasons:

  • Applying for multiple loans can result in several hard inquiries into your credit in a short time, which can send your credit score plummeting. 
  • You don’t have to go through the headache and time of applying for multiple loans. 
  • You would likely be able to secure an overall better interest rate on one larger loan versus several small loans. 
  • You only have to think about one loan payment on one date every month. Having multiple payments can increase the risk of you missing or making a late payment, which can negatively impact your credit score. 

How to Get a Business Equipment Loan

Now that you know everything to watch out for and consider, the next step is to apply for a loan. Follow these steps as you look to apply for a business equipment loan:

Where to Find a Lender

You can get business equipment loans from banks, credit unions and online lenders. There are also equipment financing companies that specialize in industries. For example, if you’re in construction, you might prefer to work with a construction equipment financing lender. 

Consider Your Loan Type

You should think about the type of loan you prefer. If you choose a secured loan — where the equipment is the collateral — you typically won’t have to make a down payment. Secured loans usually come with lower interest rates and higher borrowing amounts. 

In comparison, if you don’t want to use your equipment as collateral, you’ll want to get an unsecured loan. Unsecured loans are more likely to require a down payment and good credit standing. However, an unsecured loan will likely come with a slightly higher interest rate. 

You should determine your preferred loan type, but it’s also important to know know that you might not have a choice in the matter. Individuals with poor credit or those who fail to meet all the loan requirements, such as  minimum annual revenue and minimum years in operation, may only be offered secured business equipment loans to offset their risk as a borrower. 

Have a Business Plan

Business equipment loans only allow for the money to be used toward actual equipment expenses. As a result, you have to provide a plan to your lender that includes:

  • The equipment you want to buy
  • Where you want to buy it
  • Estimated costs
  • How the equipment will benefit your company

Some lenders may also ask to see business financial documents to confirm that you can afford to pay back the loan. 

Find the Best Rate

As business equipment loans can be relatively easy to secure, don’t assume you have to go for the first offer you get. Do your research and compare several lenders, so you can find the best rate possible. 

However, don’t allow each lender to pull a hard inquiry into your credit, as this can negatively impact your credit score. Ask lenders to give you estimated rates based on a soft credit inquiry. Once you find the lender with the best rate, you can allow them to pull a hard inquiry. 

Lendzi Can Help You Get a Business Equipment Loan

If you don’t know where to start with your business equipment loan, let us help. We know loans can be complicated, and, as a business owner, you don’t have a lot of extra time. Loans are what we do best, including business equipment loans.

Lendzi helps business owners compare lending options, so they can get funded fast. You simply fill out one application — don’t worry, there’s no fee and no impact on your credit score. After applying, sit back and let us do all the work. We’ll compare your loan options from over 60 lenders and help you choose the best one. Get started with a Lendzi application today. 

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