Equipment Financing

Be it desks for an expanding office, ovens for a growing restaurant, or the latest dental X-ray machines, most small businesses will face the need for new equipment. But the often high expense of purchasing this equipment can create a quick need for cash, and an open question as to how to fill that need. Even if your business has the funds to cover the capital expense, you may prefer to invest that money in other areas of the business. As such, equipment financing can be a highly useful tool.

There are two options when it comes to financing new equipment for your business:

• Take out an equipment loan
• Lease the equipment

Here’s a rundown of each, and how to know which option to choose for your business needs.

Business Equipment Loans

Equipment loans can come from a variety of sources, depending on your eligibility/credit score and your needs.

These sources include:

• Commercial bank loans
• Credit unions
• Alternative lenders
• Government-backed SBA loans

Unlike larger general-purpose small business loans, depending upon the size, equipment loans can sometimes be for smaller amounts; which might make them slightly easier to obtain.

Loans Specifically Intended for Equipment

Almost any tangible asset required to run a business will qualify for an equipment loan – computers, restaurant equipment, and machine tools all qualify. If your restaurant needs a new pizza oven, for example, considering an equipment loan could expand the options of available financing. Traditional lenders like banks and credit unions offer equipment loans, but they are also available through non-bank financing companies and other online lenders.

If you’re looking for very large and expensive equipment, like the front-end loader or road grader used by a construction company, an SBA 504 loan may even be an option. For a detailed guide of terms and how to qualify for an SBA 504 loan, read our Guide to SBA Loans.

Terms for equipment loans at commercial banks and credit unions will vary depending on the lender. Commercial loan repayment terms can be fixed or variable rate, and the repayment period can vary but tends to max out at seven years for most commercial loans. Interest rates will vary depending on the bank, your credit, and the amount borrowed, but most fall in the 6-12% range.

Credit unions may have more favorable terms, such as lower interest rates and 10-year repayment periods, but you must be a member of the credit union in order to apply.

Equipment Loan Rates and Terms

An equipment loan usually involves less time to apply and often will get a faster answer from the bank than a typical small business loan – usually within a few days of submitting an application.

Alternative lenders also offer equipment loans. These lenders will also get you an answer to your loan request within a couple of days, providing a good option if you need the equipment fast. You might pay a higher interest rate when compared to a traditional bank loan or credit union, but are likely to have a shorter repayment period – usually between 6 months to 2 years.

While terms from different lenders vary, most lenders will ask for a down payment, likely 20%, for the loan. An SBA 504 loan will require a 10% down payment. As with most loans, the interest on an equipment loan is tax-deductible.

How to Apply For Business Equipment Loans?

As with any business loan, you’ll want to have your paperwork prepared in advance. It’s helpful to have a detailed business plan that explains why you need the equipment, and how the purchase will take your business to the next level.

You will also need profit and loss statements for your business to show cash flow. It helps to bring a copy of your resume too, just to demonstrate your experience in the business. The loan will require some form of collateral to guarantee it, but in most cases, the equipment itself may serve as part of or all of the collateral.

Leasing Equipment

Leasing equipment can be a good alternative to taking out a loan if the equipment you need will become outdated and/or need to be replaced fast. It’s also a great way to purchase the equipment you may want to keep after the end of the lease. Lease payments are often less than a loan payment and some end-of-lease buyouts are as inexpensive as $1.

Which Equipment Is Better to Lease?

The following are examples of equipment that may be a better candidate for leasing than buying:

• High tech computers
• Software
• Medical equipment
• Any equipment that gets a lot of wear and tear

Remember, most lease agreements allow you to purchase the equipment at the end of the lease.

Pros of Leasing

Leases can be easier to qualify for and sometimes have more flexible terms when compared to an equipment loan. Some leases can often be obtained without any down payment. Plus if you are leasing equipment that needs to be upgraded often, you may be able to include lease terms letting you exchange the equipment for an upgrade after a certain period of time.

Also, the full amount of a lease payment is tax-deductible, versus only the interest on loans. But keep in mind that to claim your payment as a business deduction, you must exclusively lease it, without any provision allowing you to own the equipment at the end of the lease.

Cons of Leasing

While a lease can provide a means of getting the equipment you need while freeing up funds you may want to use for other expenses, in some instances, leasing can end up costing more than a loan. For example, if you decide you no longer need the equipment after a year, and your lease is for two years or longer, you will likely need to continue making payments.

To Sum Up

One of the key decisions to make in determining the best way to finance equipment will be choosing between taking out a loan, or leasing what you need. While each option comes with benefits, the key will be to examine your situation and make a judgment, based on factors including your immediate need for cash, your potential use of that cash for investments or needs other than equipment, and the longevity of the equipment itself.

Many online lenders use technology to evaluate businesses differently from traditional lenders. For example, online lenders may access a business’ transactions and cash flow via their bank account’s website or examine other digital data points to analyze a business.

What is an Online Business Loan?

An online business loan is a source of funding that businesses can apply for and access via online lenders. Online business loans are useful options for small businesses in particular, because the application process is easier, and approval time can be shorter than traditional business loans.

Shorter Term Online Business Loans

This lender provides business owners with loans ranging from three to 24 months. These loans are often used for specific, shorter-term projects such as purchasing inventory, launching marketing campaigns, or general working capital. Some examples of shorter-term lenders are:

• OnDeck – works largely with “Main Street” businesses and offers loans of up to $250,000. OnDeck has loaned over $3 billion nationwide.

Longer-Term Online Business Loans

These lenders provide business owners with loans that range from 1 to 5 years with amounts up to $500,000. These loans are often used for longer-term projects such as major renovations or the opening new location. Some examples of these longer-term lenders are:

• Funding Circle – started in the U.K. and has lent over $700 million globally to small businesses; Funding Circle offers loans up to $500,000

Benefits of Online Business Loans

Online business loans present some benefits over traditional loans, including:

• Easier application process
• No need to go into a physical bank or lender’s office
• More options so business owners can choose the online business loan that best suits their business needs
• Flexible terms and repayment options
• Faster approval and access to funds

Best Uses for Online Business Loans

Online business loans can be used for a number of business needs, including:

• Working capital to cover operational and other expenses
• Cash flow to cover payroll or one-time gap payments
• Equipment purchases
• Technology or infrastructure investment
• Inventory scaling or purchasing
• Refinancing
• Real estate purchasing

Online Business vs. Traditional Business Loans

Online business loans are distinct from traditional loans in several ways, many of which are favorable for businesses, particularly small businesses, but there are some watch-outs.

Online Business Loans

• Flexible qualifications and terms
• Easier to qualify
• Quicker to get approved and get access to funds
• Streamlined underwriting process
• Higher fees and interest

Traditional Loans

• Require more documentation and collateral in most instances
• Specific qualification requirements
• More rigid underwriting process
• Potentially lower fees and interest

How to Choose the Right Loan For Your Business?

Choosing the right loan for your business will depend on several variables, including:

• How long you have been in business?
• Your business credit profile
• The financial health of your business
• How much money you need?
• What do you plan to use the funds for?
• Whether you have existing loans or other debt
• What repayment terms are you comfortable with, including time to repay, interest, and fees?

Services like kerfunding.com can help you compare what business loans are available to meet your needs and qualifications.

Rates & Repayment

Online business loans tend to have a higher interest rate relative to traditional bank loans. However, they also have much higher approval rates and can provide funding far quicker than traditional lenders. The rates will vary by lender, term, and risk and are typically lower than other options such as merchant cash advances. Repayment methods also vary depending on the lender, so make sure to do your research and find the best fit for your business. Some lenders require a fixed amount daily or weekly, while others require a traditional monthly payment.

Qualifications and Requirements for Online Business Loans

These both vary from lender to lender, but here are some general guidelines:

• Required Time in Business: Usually between 1-2 years
• Minimum Annual Revenue: $75,000 – $250,000
• Minimum Personal Credit Score: 500-650
• Industry: Industry requirements vary by lender, but restricted industries sometimes include financial services, home builders, real estate investors, etc.

The Best Online Business Loan Options

The type of business loan that’s right for your business will take into consideration the above factors as well as what lenders will approve your application. Some of the best online business loan options are:

• Fundbox: Loan amounts up to $150K with a minimum credit score of 600
• Funding Circle: Loans up to $500K with credit scores of 660
• Bluevine: Loans up to $250K with a credit score of 620 or up
• Ondeck: Loans up to $250K with a credit score of 600 or up

Application Process

A major benefit of online business funding is how easy it is to apply for a loan. Applications are usually just a single page and tend to be very straightforward. They can be completed online, over the phone, or via fax. However, there are certain things you’ll need for non-bank lenders, including:

• Your Social Security Number
• Your Business Tax ID
• Connection to your business bank account or paper bank statements (for certain lenders)
• Financial statements (typically for larger loan sizes)

Another advantage to working with online lenders is the quickness of their review process. The shorter-term lenders can often provide a decision in minutes or hours, while the longer-term lenders may have a decision within a few days. In a world where an application for financing in a traditional setting can take weeks or even months, the speed and simplicity offered by online business lenders are a major attraction for many business owners.