As a business owner, you recognize that having the right equipment is critical to the success of your business, but keeping that equipment running and up to date can be costly.
Equipment financing can help you grow your business while still retaining the cash you need for payroll, rent, and marketing costs. Find out how equipment loan works, what are the benefits, and how to get the right equipment loan for your business.
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What is a professional equipment loan?
A business equipment loan, or equipment financing, provides businesses with the financing they need to upgrade or repair the equipment they use for their day-to-day business functions. Qualifying equipment includes appliances, vehicles and electronic devices, such as computers. An equipment loan agreement generally cannot be used for payroll, real estate, debt service, or other expenses.
After your loan demand is approved and you receive financing, you start making payments on the loan, which includes the full cost of the equipment plus interest over a specified period. Once you have paid off the entire term loan, you own the equipment.
What are equipment loans used for
Here are some of the most common reasons businesses take out an equipment loan:
- Heavy equipment. Large dump trucks, shipping platforms, and the like fall into this category, and they can easily cost over $ 100,000. Heavy equipment is needed for many areas of work, including construction, shipping, and manufacturing, and for many businesses the only way to get these essential pieces of equipment is to get a loan from commercial equipment.
- Catering equipment. Industrial kitchens don’t come cheap. Industrial ovens, ranges, deep fryers, prep tables, and dishwashers can all cost thousands of dollars. Even replacing plates or glassware can be expensive when ordered at a scale needed for a busy restaurant.
- Construction. Vehicle tools like backhoes or cranes can easily cost tens of thousands of dollars. Other construction equipment, such as hand tools and power tools, may need to be purchased in bulk, increasing costs for small businesses.
- Manufacturing. Manufacturing equipment is available in all varieties. Computers for workstations and machines for hazardous work fall within this competence. According to O’Neal Manufacturing Services, the average cost of manufacturing equipment is between $ 50,000 and $ 70,000.
- Office supplies. Office equipment can include a multi-function copier, computers, servers, networking equipment, desks and chairs.
What are the advantages of an equipment loan?
According to the Equipment Leasing and Finance Association, 78% of US companies finance their equipment, regardless of company size and industry. Here are some of the reasons why so many companies choose this type of financing:
- Ownership. Once the loan is fully repaid, you own the equipment. Business equipment loans are especially useful for larger purchases, such as appliances and furniture, which you can liquidate when you need to upgrade.
- Cash reserves. If you need cash quickly, an equipment loan can allow you to direct your cash flow towards other business expenses, such as payroll, rent, and advertising.
- Increased income. If you are sure that the new equipment will increase your sales (for example, an additional oven in a bakery that will allow you to produce more products to sell), you can increase your income while maintaining your working capital.
- Easy approval. While some types of commercial loans can be difficult for small businesses to obtain, equipment loans have a built-in collateral meaning lenders are more comfortable approving small business applicants.
- No down payment. Since equipment loans typically use the equipment you buy as collateral, you can often finance 100% of the equipment without a down payment.
- Competitive advantage. You need to maintain and update your business equipment if you want to be competitive in the face of the competition. Equipment financing makes upgrading or replacing equipment more affordable in the short term because it gives you the ability to pay over time.
- Fixed rates. Fixed rate business equipment loans allow you to secure a low interest rate. This can be more profitable than a variable rate loan if interest rates rise over the life of your loan.
- Bundled charges. Sometimes new equipment requires professional installation and regular maintenance. An equipment loan can account for these additional costs by consolidating them into your loan total.
- Tax breaks. The purchase of new equipment is a business expense and can often be Deduction under section 179. This also applies to equipment purchased with an equipment loan. If your equipment qualifies, you can deduct 100% of the purchase – up to $ 500,000 – on that year’s taxes, reducing your tax liability.
- Reduced incidental costs. The incidental costs cover the costs and the delivery. Depending on the lender, you may be able to get up to 25% of the incidental costs covered. Check with your lender to see if any ancillary costs are covered by your particular loan.
- Flexible payments. Does your turnover fluctuate? Depending on the lender, you may be able to arrange a flexible payment schedule and choose to pay monthly, quarterly, seasonally, or even annually.
Which lenders offer equipment loans?
There are four main places to apply for an equipment loan: banks, credit unions, online lenders, and equipment vendors. All lenders have different loan terms and options.
Choosing a financial institution you trust and already have a relationship with is your best bet for negotiating favorable payment terms and getting quick approval.
Do professional equipment lenders require guarantees?
Depending on the loan agreement, it may be possible to use the equipment you are financing as collateral. Then, if you can’t make payments on the equipment, the lender can take possession of it.
Alternatively, some equipment loans may require you to sign a personal guarantee or accept a general lien. If you default on your loan and you signed a personal guarantee, you must make the repayments of the loan yourself or the lender will assume ownership of the personal property. Or, if you’ve signed a general lien, it gives the lender the power to take your business assets, which can include the equipment you’re financing, and possibly other items, if you don’t make the required loan payments. .
How to get a loan of equipment?
As with any business loan, your business must meet certain conditions to be eligible. While some requirements may vary by lender, the following requirements are common for getting an equipment loan:
- Credit score. A good credit rating is essential for obtaining loans to develop your business. If you have a high credit score, you will benefit from a lower interest rate and better loan terms.
- Business plan. You will need to provide your lender with a proposal of the objectives of your company, your annual turnover and the number of years you have been in business. Some lenders require borrowers to have been in business for a certain number of years and to meet an annual income threshold.
- Cash flow. The lender will need a balance sheet that helps assess your income and expenses and determine if you have enough cash flow to pay off your loan. If you don’t have an accounting department, consider hire a CPA to tidy up your paperwork, which can increase your chances of getting approved in a timely manner.
- Personal finance. In addition to providing balance sheets for your business, you may need to show information regarding your personal finances.
- Personal summary. All lenders will appreciate an updated personal resume with your loan application. It helps you connect with the lender, provides insight into your character, and supports your business plan documents.
When to consider a loan of equipment
Assuming you need equipment that is expensive enough to justify a loan, the equipment loan process is beneficial for small business owners. It may be easier to demonstrate your need to an equipment loan specialist than to a bank. It also reduces the amount of work required on your end.
There are also potential tax benefits to an equipment loan. You may be able to deduct the interest from your taxes and use the loan to reduce your net income and equity without depleting your working capital. Loaning equipment can be the way to get you the things you need while keeping a large cash reserve and avoiding being hit hard in tax time.
Should we finance or rent professional equipment?
When you are approved for an equipment loan, the equipment you purchase is used as collateral. When you pay off the loan in full, your business owns the equipment.
If you are having difficulty qualifying for an equipment loan, an equipment lease may be an alternative to consider, as it is often easier to qualify if you have cash flow or business credit issues. When the lease ends after a fixed term, you can purchase the equipment, renew the lease, or end the lease directly from the equipment rental company.
If you choose to lease, there are two main options: operating leases and capital leases. An operating lease offers a low monthly payment, and you will be allowed to purchase the equipment at the end of the lease for fair market value.
Capital leases require higher monthly payments and reflect the structure of a loan. When the lease is over, you can purchase the equipment at low cost, sometimes up to 10% of the retail price. [Read related article: Equipment Loan or Lease: Which Option Is Right for You?]