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What Is Equipment Financing?

Equipment financing is a type of business loan that provides capital specifically for the purpose of purchasing new or used equipment—whether vehicles, machinery, or technology. You can access equipment loans equal to up to 100% of the value of the equipment you’re looking to purchase. These loans are then paid back over time, with interest.

Similar to invoice financing, business equipment financing is a form of asset-based financing, in which the equipment itself serves as collateral for the loan. For this reason, equipment financing is often easier to qualify for than other types of small business loans. Along these lines, equipment loans can be great options for startups, or businesses with average or poor credit scores.

Equipment Financing Details

Max. Loan AmountLoan TermInterest RatesSpeed
Up to 100% of equipment valueFive to six years4% to 40%As fast as 2 days
Pros
  • Quick funding for equipment purchases
  • Equipment itself serves as collateral on the loan
  • Easier to qualify for than other business loans
  • Affordable interest rates
  • Limited paperwork and fast application process
Cons
  • Equipment could be obsolete by the time the loan is fully repaid
  • May require a down payment
  • Only applicable to businesses who need to purchase equipment

How Does Equipment Financing Work?

Typically, equipment financing works similarly to a business term loan. You receive a loan for the purpose of purchasing new or used business equipment and pay back the loan with fixed payments over a set period of time.

The amount of capital you can access, as we mentioned above, can equal up to 100% the value of the equipment you’re looking to purchase—the amount may vary, however, depending on the type and condition of the equipment, as well as the lender and your qualifications as a business.

Again, business equipment financing is a type of asset-based financing—meaning the equipment itself is used to back, or secure the loan. Generally, this means you won’t have to put up additional collateral and you may be able to avoid signing a personal guarantee.

You may, however, be required to provide a down payment of 10% to 25% of the equipment you’re financing. The larger a down payment you can provide, the lower the interest rates you’re likely to receive. Overall, equipment financing rates typically range from 4% to 40%, varying, of course, based on the lender, your business’s qualifications, and the equipment you’re purchasing.

This being said, the repayment terms on equipment financing are usually five to six years, although some lenders may offer longer terms, up to 10 years. Additionally, some lenders may base your repayment terms on the anticipated life of the equipment—that way, if you default on the loan and they have to seize the equipment and liquidate it, they’ll still be able to recover their losses.

Equipment Financing vs. Equipment Leasing

In order to understand how equipment financing works, it’s important to differentiate between equipment financing and equipment leasing. Although there are some nuanced differences between the two, when it comes down to it, the main difference is that with an equipment loan, you own the equipment at the end of your repayment period.

With equipment leasing, on the other hand, you don’t own the equipment at the end of the term. Instead, you have the option to purchase the equipment outright, or enter into a new lease for the equipment you need—similar to leasing a car.
Generally, equipment leasing is more expensive than equipment financing in the long run. With this in mind, you can refer to our equipment leasing vs. financing guide to learn more about the differences between these options.

Equipment Financing Example

Now that we have a basic sense of how equipment financing works, let’s walk through an example. 

Let’s say you need to purchase a commercial oven for your restaurant—the oven costs $10,000.

You find a lender that’s willing to offer you an equipment loan for the full price of the equipment ($10,000). The lender will charge a 12% interest rate over a three-year term with monthly repayments.

With this setup, you’ll pay back the capital you’ve borrowed during the three-year term with monthly payments of $332.14 (assuming there are no other loan fees). Overall, this means you’ll be paying $11,957.15 for a $10,000 piece of equipment and the actual cost of your equipment loan is $1,957.15.

Although this may seem like a sizable amount to pay based on the value of the equipment, the benefit of business equipment financing (like most debt financing) is that you can pay for this large purchase over three years and don’t have to take the time to save $10,000 to purchase the oven you need right now.

This being said, it’s always important to understand the true cost of your financing before agreeing to an equipment (or any other type) of loan. You can use our equipment loan calculator to help you with this process.

Pros and Cons of Business Equipment Financing

When it comes down to it, if you’re looking for funding to purchase equipment for your business, there’s no doubt that equipment financing is a great option. In fact, this type of financing can often offer the most ideal rates and terms for equipment-specific funding.

With this in mind, however, an equipment loan will not always be the best solution for every business and situation, and therefore, it’s worth breaking down the pros and cons of equipment financing so that you can determine whether or not it’s right for your needs.

Pros:

  • Quick funding for equipment purchases: Whereas some other types of business loans (like bank and SBA loans) can take weeks or months to fund, equipment loans are typically considered a very fast form of financing. As long as you have the necessary information about the equipment you’re looking to purchase ahead of time, you can often receive equipment financing in just a few days.
  • Equipment itself serves as collateral on the loan: One of the biggest benefits of equipment loans is that they’re self-collateralizing. Therefore, instead of having to put up real estate or other business property as collateral, the equipment itself secures your loan. Additionally, because the equipment itself serves as collateral, you may be able to work with your lender to avoid signing a personal guarantee on the loan.
  • Easier to qualify for than other business loans: Generally, equipment financing is much easier to qualify for in comparison to other types of business loans. For this reason, equipment loans are a great option for startups or businesses with bad credit. Overall, because the equipment secures the loan, lenders are often willing to work with businesses with lower qualifications—the self-securing nature of business equipment financing makes it less risky for lenders. Moreover, most equipment lenders report your payment history to business credit bureaus—meaning on-time payments will improve your credit history and make it easier for you to qualify for other loans in the future—which is particularly helpful for newer and bad credit businesses.
  • Affordable interest rates: As we mentioned above, equipment financing rates typically range from 4% to 40%. Of course, the interest rate you receive will vary—but overall, these rates are generally affordable. If you fall on the lower end of the interest rate range, you’ll receive rates that are akin to bank or SBA loans. Moreover, you may be able to save additional money on the cost of your equipment and your taxes by taking the Section 179 business tax deduction.
  • Limited paperwork and fast application process: Business equipment financing is available from both banks and alternative lenders. As you might expect, alternative, online lenders will have the fastest and most streamlined processes—in general, though, applying for equipment financing is a simple and quick process. Again, because lenders aren’t as concerned with your business’s qualifications, you’ll usually see limited documentation requirements, especially in comparison to other types of financing.

Cons:

  • Equipment could be obsolete by the time the loan is fully repaid: Perhaps the biggest drawback of business equipment financing is that by the time you’ve repaid the loan and you own your equipment, the equipment may be outdated or obsolete. As we mentioned above, this is one of the reasons that some business owners opt for equipment leasing instead of financing. In addition, it’s important to note that you don’t actually own the equipment until you’ve paid off the loan—which is something to keep in mind.
  • May require a down payment: In some cases, you’ll need to put down 10% to 25% of the value of the equipment to access financing. If your business doesn’t have the money required for the down payment, it may be more difficult for you to get equipment financing. Plus, if you can only make the minimum down payment amount, the more likely you are to see higher interest rates.
  • Only applicable to businesses who need to purchase equipment: Of course, equipment loans are a very specific type of financing that fulfill a very specific need. Therefore, if you need funding for another business purpose, you’ll have to explore your other options.

The Best Equipment Loan Lenders

Now that we’ve reviewed how equipment financing works and the possible pros and cons of this type of funding, let’s discuss how to get equipment financing.

As we briefly mentioned, equipment loans are available from both banks and online lenders—so you’ll have a range of different options to choose from to find the right financing for your business.

With this in mind, you might start your search with some of the top equipment financing companies below:

Financing Company Funding Amount Interest Rates and Terms Speed How to Qualify Best For
 Up to $1 million
 Starting at around 10%; up to five years
As fast as the same day
“Decent” credit score; at least one year in business; $100,000 annual revenue
Larger funding amounts, faster funding than a bank
 Up to $2 million
 Start as low as 6%; Up to seven years
As fast as one day
620 minimum credit score; $120,000 annual revenue
Equipment loans for startups, fast funding for larger equipment purchases
 Up to $500,000
 As low as 5%; two to seven years
As fast as one day
650 minimum credit score; at least two years in business
Equipment loans for highly qualified borrowers; low interest rates
 Up to $500,000
 As low as 5.49%; six months to six years
As fast as the same day
620 minimum credit score
Flexible requirements; equipment loans for startups
 $3,000 and up
 6% to 35%; two to five years
 As fast as one day
No specified minimum requirements
Equipment leasing; financing for startups, businesses with bad credit

Balboa Capital

Best for: Fast access to long-term equipment loans.

Equipment Loans for Startups

As we’ve mentioned, equipment financing is a worthwhile option for many startup businesses, as these loans are easier to qualify for in comparison to other types of business loans. Once again, with the equipment serving as collateral on the loan, you don’t necessarily need multiple years in business or excellent financials in order to be able to access equipment financing.

Therefore, if you need to purchase equipment for your startup, you might start by looking into Currency Capital, eLease, or CIT, as none of these lenders have a minimum time in business requirement. Additionally, if you are a startup with at least one year in business, you might also consider Balboa Capital—especially if you have a credit score under 620.

Of course, with any of these lenders, it’s important to remember that even if you qualify, you’re more likely to see higher interest rates in comparison with more established businesses. This being said, however, the stronger your other business loan requirements are, the more flexibility you’ll have working with the lender to access the most ideal rates and terms as a startup.

Who Qualifies for Equipment Financing?

As it turns out, most businesses can qualify for equipment financing loans.

How much you qualify for—and the interest rate you’ll pay—depends on the value of that equipment, your business’s financial history, and your credit score.

Equipment financing can be a great option if your credit rating is less than perfect, too, since the equipment acts as collateral.

In fact, equipment lenders are just as concerned with what’s securing their loan as with your borrowing history. So, if you’re planning on investing in a high-value (and value-retaining) piece of equipment with your small business equipment loan, then equipment lenders might be willing to work with you, even if your finances aren’t pristine.

How to Get Equipment Financing

So, if you think one of these top equipment loan options might be right for your business, you may be wondering how to actually get the financing you need.

Find the equipment you’d like to purchase: The first requirement for getting equipment financing is finding and choosing the piece of equipment you’d like to purchase. With the application process, many lenders will require that you offer an equipment quote, as well as details about the equipment and its condition. 

Therefore, you’ll want to make sure that you have this step completed from the beginning.

Evaluate your qualifications: Next, once you’ve done the necessary research on the equipment you’d like to purchase, you’ll be able to start looking at your options and determining where you’ll be able to qualify.

As shown above, the specific requirements that you’ll need to meet to qualify for business equipment financing will vary based on the lender—generally, however, qualifications (annual revenue, time in business, credit score) will be much more flexible compared to other types of loans. 

With this in mind, though, as we’ve discussed, the better your qualifications, the more likely you’ll be to access the most ideal rates and terms.

Complete your application: Finally, after you’ve evaluated your qualifications and determined which lenders are the best options for your business, you’ll be ready to prepare and submit your loan application.

Typically, you’ll be able to complete your equipment loan application online very quickly and easily. Equipment financing usually requires minimal documentation and a streamlined application process. This being said, however, you can expect to provide some if not all of the following:

  • Driver’s license
  • Voided business check
  • Bank statements
  • Credit score
  • Business tax returns
  • Equipment quote

Generally, online lenders can process and fund business equipment financing applications in just a few days, sometimes faster. If you apply for an equipment loan through a bank, on the other hand, you’ll likely see a slower time to fund.

Of course, before you sign an equipment loan agreement and enter the closing process, you’ll want to compare options from multiple lenders to ensure that you’re getting the best, most affordable deal for your business. 

The Bottom Line

At the end of the day, equipment financing is an ideal solution for funding business equipment purchases. Although you may be able to use other types of loans to cover these purchases, equipment-specific financing often comes with affordable rates, flexible terms, and fast funding times. Plus, as a self-collaterizing form of financing, equipment loans are much more accessible for startups and businesses with bad credit.

This being said, however, equipment financing will not be right for every business—especially if you’re a highly qualified business that may be able to access even lower rates with a long-term bank or SBA loan. Ultimately, therefore, you’ll want to take the time to explore and compare all of your business loan options to find what’s best for your needs.

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