Funding Specialist
The Ultimate Equipment Financing Guide
- Everything you need to know
- What is equipment financing?
- Who uses equipment financing?
- What to look for
- How to get approved
- Pros and cons of equipment financing
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Everything You Need to Know About Equipment Financing
Whether you run a new business or you’ve been in business for many years, most small businesses need to get new equipment from time to time, and for a variety of reasons.
If you’re starting a new construction company, for example, you might need to assemble your inaugural fleet of heavy machinery.
If you’re an entrepreneur, you might decide to open up a non-emergency medical transportation business and need to buy an ambulance.
A successful restaurateur might decide to remodel their kitchen—or open a new location altogether. A growing painting company may decide to purchase an additional utility van to serve more customers.
Whatever the case may be, these expenditures—particularly when they are unplanned—can be prohibitively expensive.
Restaurateurs, for example, can expect to spend between $30,000–$150,000 to simply upgrade their kitchen. Few small business owners have that kind of cash sitting in their Rainy Day Fund.
Unless a company has enormous cash reserves in the bank, chances are they’ll have to figure out how to finance most of the equipment and machinery purchases they need to make.
Why?
One of the biggest reasons: 60% of small businesses face cash flow problems each year.
When a company needs to acquire new equipment, upgrade existing machinery, or replace old equipment, it can be quite difficult to find the funds needed to do so.
After all, small business owners have to pay operating expenses every month, and they need money on hand to be able to pursue new opportunities, too. That being the case, many small business owners who need equipment and machinery look to outside sources for financing.
Read on in this guide to learn all about equipment loans for your business.
What Is Equipment Financing?
As the name suggests, equipment financing is a form of financing that enables small business owners to get the equipment and machinery they need to grow their companies when they’re short on cash.
In most instances, depending on the lender, small businesses are responsible for a down payment of 10%–30%; the loan provider finances the rest. Some lenders, however, may be willing to finance the entire cost of the equipment—at a higher cost.
Unlike traditional bank loans—which may require you to put up your own property to obtain—you don’t have to put up any collateral to secure an equipment loan. In the event you are unable to repay your debt, however, the lender may repossess the equipment you’ve procured and use it to cover its losses.
The equipment loan landscape is quite diverse with many highly specialized lenders. Some lenders exist solely to finance construction companies while others only lend to agricultural businesses, and so on.
Since lenders can repossess your equipment in the event you can’t repay your loan, these financial vehicles are relatively easy for most small business owners to obtain. From a lender’s standpoint, there’s less risk. However, because acquiring new equipment usually translates into increased revenue, many borrowers have no problem settling their debts.
Who Uses Equipment Loans?
Businesses across all industries can use equipment loans. Some examples of these use cases include:
- Construction companies: Use an equipment loan to buy bulldozers, backhoes, excavators, and other heavy-duty machinery to build houses and commercial buildings.
- Farming businesses: Those in the agriculture industry can use equipment loans to obtain tractors, sprinkler systems, milking machines, plows, and more.
- Auto body shops: Mechanics might turn to an equipment loan to finance the procurement of diagnostics machines, welding equipment, specialized auto parts tools, and other body shop necessities.
- Shipping Companies: The owner of a shipping company might need an equipment loan to expand their fleet of trucks.
- Healthcare Providers: A dentist or medical office may apply for an equipment loan to obtain medical equipment, including examination tables, x-ray machines, sonograms, EKG machines, and more.
- Restaurants: Refrigerators, freezers, stoves, grills, and deep fryers can also be financed via equipment loans.
- Manufacturers: Wrapping and packaging machinery, conveyor belts, and specialized manufacturing equipment can be obtained with an equipment loan.
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How Do You Get Approved For Equipment Financing?
How exactly do you go about applying for an equipment loan?
While every lender’s application process is slightly different, here’s what you can generally expect you’ll need to do in order to see whether you qualify for financing:
Gather your business information. Since equipment loan providers have the machinery itself as collateral, they generally ask applicants to submit less information than traditional small business lenders would.
In most instances, they’ll require you to submit basic information about your business, including ownership information, contact information, federal tax ID numbers, and whether your business is an LLC, corporation, partnership or sole proprietorship.
Make sure your credit is in good shape. Equipment loan providers will almost certainly want to check either your personal or business credit score before making a decision about your application. Your credit score is a large part of how they determine the likelihood that you will repay your loan.
Remember, when it comes to equipment financing, having a less-than-perfect credit score won’t necessarily prevent you from securing financing since the equipment itself serves as collateral. Still, lenders will generally prefer to give loans to business owners who have personal credit scores of at least 600 or business credit scores of at least 75, though some providers are more flexible.
To increase your chances of approval, make sure your credit is in good shape before you apply for an equipment loan. If your scores are a bit lower than you’d like, you can take proactive steps to improve them before submitting your application.
Collect financial statements. You’ll also need to gather your business’ financial records. Equipment loan lenders typically like to see financial statements, bank balances, and tax records. They’ll likely want to see credit score information, too.
Create a detailed plan. How do you intend to invest your equipment loan? Lenders will want to know. The more thorough and detailed plan you have, the more likely equipment loan providers will be to sign off on your application.
Shop equipment loan lenders. Once you’ve gathered the information you’ll need to secure a loan, it’s time to shop providers. Use the above criteria to find a lender that is willing to offer you the money you need with comfortable terms that make sense for your unique situation, if it’s possible.
In most cases, applying for an equipment loan is much easier—and faster—than applying for a traditional small business loan from a bank or other traditional financial institution.
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