Equipment Financing

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—anything from vehicles, machinery, technology and more. You can access equipment loans up to one hundred percent of the value of the equipment you’re looking to purchase.

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. Making equipment loans a great option for startups, or businesses with average/poor credit scores.

Equipment Financing Details

Pros

• Quick funding for equipment purchases
• Equipment serves as collateral on the loan
• Easier to qualify than alternative business loans
• 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 the way it works is that 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.

Business equipment financing is a type of asset-based financing—meaning the equipment itself is used to back, or secure the loan (oftentimes 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. Some lenders may base your repayment terms on the anticipated life of the equipment.

Equipment Financing Example

Let’s say you need to purchase a commercial fridge for your ice-cream shop at the costs of $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.

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.