If You’re Considering an Equipment Loan, Read This First
Wondering if an equipment loan can help your small business? Curious what you can purchase with funds from an equipment loan? Read on to learn more and decide whether an equipment loan is right for your business.
Reasons to Apply for an Equipment Loan
An equipment loan is a good option to help you buy the computers, machinery, vehicles, and other equipment your business needs. There are a few advantages to equipment loans that make them particularly helpful:
- They provide quick access to cash
- They require limited paperwork
- The equipment itself serves as collateral for the loan
- Equipment loans can help you build your credit
- There are potential tax benefits associated with equipment loans
- It’s possible to get a loan even if your credit is bad
One possible alternative to an equipment loan is leasing your business equipment. Leasing may have some advantages. However, the biggest drawback is that you don’t own the equipment when the lease ends. When you pay off an equipment loan, the equipment is yours.
How an Equipment Loan Works
An equipment loan can be used for many different equipment types, but the amount of money you can borrow is determined by the type of equipment you intend to purchase and whether it’s new or used.
These loans are similar to car loans in that the equipment you purchase is the collateral that secures the loan. That saves you from having to put up any additional collateral. In most cases, the loan you obtain will have a fixed interest rate anywhere between 8% and 30% with a set term length. Your payments will be the same every month, making it easy for you to budget for the expense.
How long you will make payments on the loan depends on a couple of factors, including the expected life of the equipment you purchase. Lenders are not typically willing to extend the term of these loans beyond the expected life of the equipment. For instance, if you financed several computers you should expect a relatively short repayment timeline. After all, electronics become obsolete quickly — that’s just the nature of technology.
Determining Your Costs
Although you will pay more for your equipment in the end, the benefit of equipment financing is that it prevents you from having to pay the entire purchase price upfront. So rather than struggling to come up with $10,000 all at once, you could potentially pay just a few hundred dollars each month for the life of the loan. For instance if you purchase the same $10,000 piece of equipment with a three-year loan that has an APR of 12%, you’d end up paying $11,957 in total. The benefit is that your monthly payments would be much easier to handle at $332.14 each.
How to Qualify
Many businesses will find it’s easy to qualify for equipment loans. The variables that determine how much you can borrow include the value of the equipment, your credit rating, and your business history. Because the equipment you purchase serves as collateral for the loan, you can even obtain this kind of financing with a less than perfect credit history.
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