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Not only does it take money to make money, but for most business owners, it also takes equipment. Every day, business owners are surrounded by equipment that’s crucial to their operations. Sometimes those things break or no longer meet the demands they were purchased to meet in the first place. It’s an all-too-true reality that one costly piece of equipment can sometimes mean the difference between profit and a deficit.
Equipment loans and leases help businesses to secure the machinery they need to keep operations running smoothly and successfully. Whether it’s a freezer for an ice cream shop or a conveyor belt for a factory assembly line, businesses can seek an equipment loan or lease to push through production, create and deliver products and, ultimately, satisfy their customers without the financial strain of buying the machinery outright.
Business equipment financing can seem incredibly complex, but in reality, companies can apply for new or used equipment financing and receive an answer online within a few days or, in some cases, just a few hours.
To help you better understand equipment financing for startup businesses and the options available to business owners seeking these financial tools, this article covers:
Equipment financing is the route to production and success for many businesses. Most small and midsize companies simply can’t dip into the coffers and lay out thousands of dollars for the new or used equipment required to get the job done, which is why they turn to banks and lenders for assistance.
So, what does equipment mean when it comes to financing these loans? Items businesses can purchase with equipment financing funds include:
| Amount Borrowed | Minimum Average Cost | Maximum Average Cost |
|---|---|---|
| $2,000 | $160 | $600 |
| $20,000 | $1,600 | $6,000 |
| $200,000 | $16,000 | $60,000 |
| $2,000,000 | $160,000 | $600,000 |
The finance rate typically refers to the interest rate or APR (covered below), but without a clear picture of the entire loan terms, businesses can get the wrong idea about the total cost of the loan. When applying for a business equipment loan, companies should make sure they understand all of the associated finance charges.
Qualifying for a loan depends on the requirements of each lender, but here are some basic guidelines:
Time in Business
Lenders typically want to see that a company has been in business for at least two years. Some lenders, such as Balboa Capital, only require one year, and a few lenders, including Currency Capital, don't have published guidelines regarding time in business.
Cash-Flow Minimum
Lenders usually require a cash-flow minimum. They want to see that the business is bringing in enough income to cover payments on the loan in addition to other operating expenses. Common minimum cash flow requirements are $100,000 to $130,000 annually. Companies may have a reduced or increased cash flow requirement depending on the amount of funding they're seeking.
Credit Scores
Most lenders are looking for minimum personal credit scores of 600 to 650. These loans typically do require a personal guarantee, which means the company owner or another signer must put up personal collateral or agree to be legally responsible for the debt should the business be unable to make agreed upon payments in the future. Businesses like Balboa Capital that don't require a personal guarantee may actually be leasing equipment with an option to purchase at the end of the term.
Collateral
Businesses seeking equipment loans don't typically have to put up any type of collateral. The equipment itself usually acts as the collateral, which means equipment financing works a bit like a personal car loan in this regard. If the business stops paying the monthly payments for any reason and defaults on the loan, the lender can repossess the equipment, selling it off to recoup losses on the loan.
With so much information to get to this point, businesses might think that the equipment financing process is incredibly complex. However, the truth is that companies can apply for new or used equipment financing and receive an answer online within a few days or, in some cases, just a few hours.
Here’s how to apply for equipment financing effectively and efficiently:
01 Find an equipment finance company that appears to meet your needs and offers the types of loans required.
02 Complete an online application and provide the required documentation. The following documents are usually required by equipment loan providers:
03 Submit the completed application with all necessary documentation in order for the lender to conduct a credit check and review all the applicable materials
04 Pending the lenders approval, loans can be funded in as little as two days, though how fast the money is received depends on the funding manner. Electronic Funds Transfer (EFT) transactions to a bank account can take up to three days, for example. Generally, businesses can expect to receive funds on an approved loan within a week.
Businesses of all sizes can leverage equipment financing to purchase heavy machinery and other expensive equipment that they could not otherwise afford to buy outright. Even if a business has the capital to buy the equipment, financing the purchase can reduce the strain on cash flow and ensure the company has the funds to meet operating expenses in the near future.
Since equipment financing can be handled online and the process can be completed in as little as a few hours, businesses can gain fast access to the cash they need to make critical infrastructure purchases. Plus, the equipment itself usually stands as collateral for the loan, which means companies and signers aren't putting their homes or other business assets at risk.
Companies can also reduce their tax burden by adding interest charges and the cost of the loan to operating expenses.
Equipment financing, however, is not without potential downsides, and these should be considered before applying for a loan. Perhaps the biggest issue is that equipment eventually becomes obsolete. If the loan is extended too long, the equipment might not be of use before the funds are fully repaid. The business may find itself making a choice between dealing with old and ineffective equipment or funding the purchase of new equipment while still making payments on the old loan.
Another disadvantage is that equipment owned by a company may depreciate, meaning that as time passes, the amount a company can deduct on its taxes is reduced.
When businesses search for equipment finance options, they're likely to come across equipment leases. Equipment lease financing rates and other terms differ significantly from purchase financing in the following ways:
Like purchase financing, leases come with benefits and disadvantages for businesses. Perhaps the biggest benefit of a lease is that the company never owns the equipment outright. This sounds like a disadvantage, but it actually removes the burden of ownership and is helpful in situations that require constant updates to equipment.
For example, if a company knows that the equipment on its factory floor will be obsolete in five years, it may be pointless to undergo the expense of financing an equipment purchase only to be in the same position later. Those who set current equipment lease rates usually understand the life of the machines and structure their pricing appropriately. Companies can then take on equipment for a lease term, upgrading to new equipment during the next term.
However, if lifespan isn’t an issue, leasing equipment is typically more expensive than a purchase. Companies that lease equipment only to purchase it at the end of the lease typically pay more than companies that purchase equipment outright via financing options.
Ownership comes with privileges. Companies that lease equipment may be limited as to what they can do with the equipment, especially when it comes to modifying or repairing the items. Leasing equipment means abiding by the rules of the leasing company when it comes to repairs and maintenance. Businesses that purchase their equipment can have items serviced in-house or by service companies of their choice.
Once offers are in hand, businesses should review the total cost of financing equipment before accepting a loan. Consider the following questions:
Having functional equipment is critical to the success of many businesses, and being without that equipment for even a short period can spell catastrophe for your clients and your financial stability. Lendzi can help. Our transparent terms, flexible options and fast, simple process provide business owners just like you with the solutions needed to keep operations running smoothly. Contact us for further information or start your application now.