How Do Equipment Loans Work?

A bank or a financial services company issues this type of loan to customers in order to help them fund a portion of their equipment’s purchase cost. Such a loan is taken used by a small business that is looking to retain cash by spreading out such expenses over several months.

What about Collateral?

Put simply, collateral is something which a borrower pledges as security for a loan’s repayment; if they fail to pay back this loan, then their lender of choice will seize the collateral. The same principle works in equipment financing as well, but here the purchased equipment itself acts as the collateral. In other words, a borrower does not have to put up anything else in that stead. Like in any other form of secured funding, here, your lender would take the equipment back in case you fail to repay the equipment loan.

What Can You Buy with an Equipment Loan?

An equipment loan is used to make big purchases of assets that are likely to retain their value over time. These physical assets include the following.

• Large automobiles, such as semi trucks.
• Manufacturing equipment (for example, laser cutting machines, plate rolling machines, band saws, and so on).
• Big commercial printers.
• Farm equipment, such as tractors.
• Healthcare equipment (for instance, diagnostic machines, infusion pumps, X-ray machines, and so forth).
• Large construction vehicles as well as equipment (for example, mixer trucks, skid steers, cranes, etc).
• Computer servers.
• Restaurant equipment, such as ovens and ranges.

Other Facts to Know about Equipment Loans

A loan of this type requires less documentation in relation to several other forms of funding (such as an SBA loan, to name one), and you can usually get funded in under a week’s time. Interest rates on this usually fall between 6% and 9%. A small business owner who has a better credit score, as well as larger down payments, could get relatively lower interest rates. A borrower with a lower credit score as well as less cash to put down would see higher rates.

The usual term of repayment for a “non-SBA” loan of this sort is 1 to 5 years, but that can extend up to 10 years depending on the size of the equipment purchased, as well as its shelf life.

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Note that lenders would have different requirements from equipment loan seekers. The following are just general qualifications which a lender will look for when they make a credit decision. Still, underwriting standards differ and should be vetted prior to selecting a lender in order to make sure that as a client, you can meet the minimum requirements they have from you.

Personal credit is an important factor in getting a loan of this kind. If you are not sure of your present credit score, then you can find that out from an online service specifically meant for this. The higher the credit score you carry, the better your chances will be of getting approval quickly and easily, and also, the better the terms you can expect.

Besides the score itself, some lenders will insist on your business plan which describes what you are about, as well as a comprehensive proposal for pursuing growth. The elementary aim here is to provide a prospective lender with your business’s detailed summary. The years you have been in business, as well as your annual revenue, are significant factors to include in this plan. Some lenders would also place threshold requirements, such as you having been in business at least 24 months, and annual revenue of more than 250,000 dollars.

Beyond the revenue statement in your business plan, as well as your profit and loss (P&L) statement, lenders’ applications might just necessitate a cash flow statement or balance sheet. These statements should identify the expenses going out of your business, and the revenue which comes into it. These help the lender assess your financial strength. Because lenders are also interested in approaching small business owners’ personal finances, statements related to that need to be prepared as well. Preparation of pertinent loan application documentation is also essential to helping speed things up. It is advisable to hire a qualified accountant in advance of the process of loan application, in order to make sure all your finances are in proper order.

Equipment Financing Providers

There are many options in the market for getting equipment financing. You can obtain equipment loans from sources that range from traditional to online lenders. It is said that traditional lenders usually have more stringent underwriting requirements, but relatively better terms and rates. They might be suitable for an established business with strong working capital and assets. A specialized online lender tends to have more flexible underwriting requirements in place. However, the terms and rates might be less favorable in some cases. An online lender is relatively more suitable to a startup or a business that does not meet the minimum asset and credit requirements of a nationwide lender. The option that you go for will depend on your business’s qualifications and the type of loan which best suits your requirements.

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How Does it Work?

Equipment financing is a form of loan used to buy a physical asset such as an oven, a copier scanner, or a vehicle. Such loans carry the option of periodic repayment covering both principal and interest over a set term. A loan provider may necessitate a lien on an equipment unit/asset as collateral against debt. After the customer has paid off the loan in full, they completely own the asset, which is then free of any sort of lien. An equipment loan has a structure that may impose a lien on additional assets or necessitate a personal guarantee. Failure to pay off a loan might lead to repossession of that business asset or even personal assets, especially in cases where the borrower has made a personal guarantee at the beginning. Because of that, it is vital to look into the terms of the loan in order to understand the risks therein.

For instance, if one is starting a restaurant, he or she will need a considerable amount of equipment, covering a commercial range, a refrigerator, and ovens. For example’s sake, let us assume the total cost to be 75,000 dollars. A customer applies and is approved for a loan to buy an equipment unit, which is equal to 80% of the cost, or 61,500 dollars. That means their out-of-pocket costs would be 13,500 dollars, and they can hold 61,500 in their cash reserves in order to offset all other expenses related to a new business, including the cost of physical space, advertising, marketing, permits, as well as licenses.

This form of financing is different from equipment leasing, in which one pays the equipment owner periodic rent for its use over an agreed-on time period. After the leasing term, except if they agree with its owner on a buyout or renewal terms, the asset is returned to its rightful owner. Usually, the qualifications for equipment leasing are less stringent in comparison to financing; although, if it is essential for a business owner, continuous payments on the leased unit are definitely an option, albeit a lot costlier when all is said and done.

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