Close button
How much money could your business be saving?
Create your Fundera account to find out.

The Insider’s Guide to Equipment Loans

Rieva Lesonsky

Rieva Lesonsky

Contributor at Fundera
Rieva Lesonsky is a small business contributor for Fundera and CEO of GrowBiz Media, a media company. She has spent 30+ years covering, consulting and speaking to small businesses owners and entrepreneurs.
Rieva Lesonsky

When you need to obtain, update or replace a critical piece of business equipment, such as a restaurant oven or a dry cleaning machine, equipment financing can be just the answer you’re looking for. Equipment loans are ideally suited for both startups and expanding businesses, providing fast access to the equipment you need to get your business going—and growing. Here’s a closer look at equipment small business loans and how they can benefit your small business.

What is an Equipment Loan?

Equipment loans are loans to buy business equipment that are secured by the equipment itself. Instead of putting up collateral such as your house or your business assets, you use the item you’re purchasing as collateral. If you don’t pay the loan back, the lender simply repossesses the item—so nothing you already own is at risk.

Why are Equipment Loans So Great?

There are plenty of reasons why a small business owner may find it preferable to obtain an equipment loan instead of a traditional, general business loan.

  • They require less documentation. Traditional business loans typically require at least two or three years of profitable operation. This can make them extremely difficult for startups—and even many thriving small businesses—to get. Lenders will want to see substantial documentation before considering your application for a general business loan. Because equipment loans are secured by the piece of equipment that’s being financed, lenders are not nearly as concerned about your business’s history or credit rating. You won’t need to provide as much documentation to get the equipment you need to start or grow your business.
  • They enable you to own cutting-edge equipment. If a crucial piece of business equipment breaks down and needs costly repairs, an equipment loan offers a way to replace it with the latest model. Isn’t that better than spending a lot of money to fix the old item, which may not have that many good years left? You immediately get a new piece of equipment with all the latest bells and whistles, which can enable you to produce more products, serve customers faster and handle more business. In addition, many equipment financing programs offer trade-in options so you can trade in the equipment for a newer model after a set time period, ensuring you’ll always own the newest equipment, which helps your business stay ahead of the competition.
  • They save you money. Equipment loans typically allow you to finance 80 to 100 percent of the cost of equipment, often with no down payment. In addition, some equipment financing companies offer flexible repayment terms that can help you maximize cash flow. For instance, you might be able to defer your first loan payment for 90 days or choose whether you want to make payments monthly, quarterly or annually. The payments on equipment loans may also be tax-deductible as operating costs (be sure to check with your accountant for your specific situation).
  • You get an answer right away. In most cases, equipment financing companies make a decision to approve or deny your loan application very quickly. Time is of the essence if a critical piece of equipment breaks down. Getting the financing you need right away can help you keep customers happy or profit from increasing demand or seasonal upswings.
  • You increase the asset value of your business. Your business immediately enjoys the value of a new asset, without a big cash outlay.

What to Know Before You Go

You can get equipment loans from banks or from a variety of alternative lending sources, including companies that specialize in equipment financing. Working with a company that’s familiar with the options and can help match you with the right lender for your needs can streamline the process even more.

Find out the requirements for the loan before you apply. Although credit requirements are less stringent than with traditional loans, there may still be minimum credit rating levels or other criteria for an equipment loan. Get your business up to these standards before you apply.

As you close in on an equipment loan, be sure to read the fine print. Here are some things to ask about:

  • Default. If you don’t pay off the loan, the financing company will repossess your equipment. However, if the asset’s value has declined since you obtained it, you may owe them the difference between its current value and the outstanding loan amount.
  • Collateral. Be sure you clearly understand the loan terms and are not putting up any collateral outside of the equipment itself.
  • Trade-ins. If your loan allows you to trade in the equipment to get an upgrade, ask what is the shortest time period before you can trade it in. Some financing companies will penalize you for trading in too early.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
Rieva Lesonsky

Rieva Lesonsky

Contributor at Fundera
Rieva Lesonsky is a small business contributor for Fundera and CEO of GrowBiz Media, a media company. She has spent 30+ years covering, consulting and speaking to small businesses owners and entrepreneurs.
Rieva Lesonsky

Our Picks