Equipment Loans: How They Work & Where to Find One
This article is part of a larger series on Business Financing.
An equipment loan is fixed financing from a lender that is used to purchase vehicles and heavy equipment. The purchased collateral secures the loan. Equipment loans can be secured from many different sources, including banks and nontraditional lenders. Because of the strong collateral, lenders offer low rates on equipment loans, ranging from 6% to 9%. In addition, origination fees can be up to 3%.
Equipment Loan Providers
Startup businesses able to put down at least 10%
Credit-challenged businesses that need access to flexible capital
Businesses with excellent credit that need 100% financing and soft costs
Newer businesses with at least six months of operations
Businesses that might need large equipment loans
Borrowers who need up to $100,000 and prefer a traditional bank
Here are six providers to consider when you need an equipment loan.
Smarter Finance USA
Smarter Finance USA is an excellent choice for startups looking for equipment financing. In addition to being open to working with startups, they offer flexible lending options and competitive rates. Startup businesses that can put at least 5% down on the purchase of their equipment and that have a personal credit score of at least 600 should choose Smarter Finance.
While Bluevine doesn’t offer direct equipment financing, its line of credit product is a good alternative type of funding for securing heavy equipment. Businesses with at least $120,000 in annual revenue, at least 6 months in business, and a personal credit score of at least 600 can qualify for a line of credit. In addition, Bluevine offers an outstanding invoice factoring product that may help your business with its cash flow.
Crest Capital is another alternative lender. Crest Capital offers competitive interest rates, whether financing new or used equipment. It also provides equipment loans and leasing for equipment manufacturers as an “in-house” lender. Companies with at least 2 years in business and a personal credit score of at least 620 can qualify. Also, no minimum revenue is required, which is a big advantage.
National Funding is a good choice for businesses with low credit scores. Scores as low as 500 may be approved if a company is otherwise well-qualified. National Funding can fund a loan in one business day, making it one of our top choices for best same-day business loans and best easy business loans. Minimum annual revenue is higher than some of the other options on this list, as businesses must earn at least $250,000 in annual revenue to qualify. Borrowers with poor credit may also end up with high annual percentage rates.
SMB Compass offers some of the largest equipment loans of any of the providers on this list, with loans of up to $5 million. Terms are available from 1 to 5 years, with rates from 5.25% to 24.99%. Funding is promised in less than 30 days on all loans, but loans of less than $200,000 can be closed within 24 hours.
Wells Fargo offers financing and refinancing of equipment as a traditional bank lender, in addition to other lending products, including Small Business Administration (SBA) loans, business credit cards, credit lines, and equipment financing. The company is phasing out personal lines of credit. Wells Fargo is a good choice for businesses wanting to secure a loan through a traditional lender or requiring other banking products in addition to an equipment loan. Terms run from 12 to 84 months on equipment loans. Wells Fargo also offers equipment lines of credit as an option.
How Equipment Loans Work
Equipment loans are made by banks or equipment financing companies to fund the purchase of large pieces of equipment. By taking a loan to purchase equipment, a company can preserve cash in the short term by spreading out payments over a period of time. In addition, by using the purchased equipment as collateral, the borrower can get better interest rates because banks view these loans as lower risk.
Equipment loans are typically used to purchase equipment that will retain its value, such as:
- Commercial vehicles: Vehicles like semi-trucks, box trucks, and vans
- Heavy machinery: Farm equipment like tractors and manufacturing equipment, such as plate rolling and computer numerical controlled (CNC) machines, and construction equipment
- Specialized equipment: Medical equipment, such as X-ray and diagnostic machines
- Other equipment: Restaurant equipment like ovens and ranges and professional office equipment, such as printers and computer servers
Equipment Loan Rates & Terms
Interest rates range from 6% to 9% for well-qualified borrowers while borrowers with poor credit scores can expect rates to be as high as 30%. Most equipment loans range from one to four years, although some can run up to 10 years depending on the type and cost of the equipment financed.
Equipment Loan Qualifications
While each bank and financial institution will have its own set of qualifications required for lenders to obtain an equipment loan, there are general guidelines borrowers should expect to meet. Loan amounts typically range between $10,000 and $500,000 with interest rates of 6% to 9% and terms of two to seven years. Borrowers should expect to put between 5% to 20% down on the purchase. Lenders typically require credit scores of at least 600 and require the equipment being purchased to be held as collateral.
Equipment Loan Tips
1. Know the Required Documentation for an Equipment Loan
If a business is applying for a standard equipment loan, there will be far less paperwork than if the business is applying for a specialized loan, such as an SBA loan. Lenders will request some or all of the following documents at the time of application:
- Equipment invoice: A quote for the equipment is required, including any additional soft costs
- Bank statements: Up to 3 months of bank statements are needed to show the business cash flow
- Tax returns: Lenders will require from 1 to 3 years of tax statements
- Financial documents: A financial statement showing profits and losses, in addition to assets and liabilities, is required
- Other: Business licenses and other documentation may be required
2. Know the Additional Costs of Your Equipment
Besides the monthly payment, there will be additional costs related to the new equipment, including insurance, maintenance, wages, and storage. Here is how those costs can add to monthly expenses:
- Insurance: Some equipment requires taking out additional insurance or adding additional costs to an existing policy
- Maintenance: This is the monthly cost to keep the equipment running in top shape and to cover normal wear and tear
- Wages: The business may have to hire someone specifically to use the equipment
- Storage: Additional costs may be added if specialized storage is needed for the equipment
3. Know How the Equipment Will Improve Your Bottom Line
While there are extra expenses associated with purchasing new equipment, there should be additional financial benefits as well. Figure out how much the new equipment will streamline the business, reduce the hours needed to complete tasks, or increase output. Those will add up to tangible benefits in the long run.
Equipment Loan Benefits
There are several benefits to financing equipment through a loan instead of a line of credit or other alternative types of financing. Some of the benefits include:
- Cash flow: Financing the equipment over time allows the business to avoid having to pay for the equipment in full
- Ownership: When the loan is satisfied, the business owns the equipment outright
- Depreciation: Depreciation can be taken over Section 179, which allows businesses to deduct the full purchase price of equipment during the tax year
- Amortization: There is no balloon payment at the end of the loan
Alternatives to Equipment Loans
Equipment loans are not the only way to finance equipment. Here are two alternatives: SBA loans and equipment leases.
SBA loans are backed by the Small Business Association and can be used for many business needs, including the purchase of equipment. There are stiffer underwriting guidelines for SBA loans, and the funding timeline is between 24 hours and 30 days under normal circumstances.
An SBA loan can be a good choice if a loan is needed for something beyond equipment funding, such as inventory, operations, or other working capital. Check out the requirements of an SBA loan before deciding to pursue this type of loan.
An equipment lease can accomplish the same goal as an equipment loan. Equipment can be financed, and ownership can change hands once the lease is satisfied. However, there are many different types of leases that have different payment structures. Some don’t require the borrower to take ownership of the equipment at the end of the lease. Check out our article on equipment leases to determine if one of these is a viable alternative to an equipment loan.
Which Type of Equipment Financing Is Best for You?
Equipment loans are best when the business is sure it wants ownership of the equipment at the end of the loan and if the business is looking for a consistent amortization of the loan with no balloon payment at the end. Leases offer more varied payment schedules and options, and SBA loans offer funding beyond just equipment loans. However, if a business wants to take out a loan to buy equipment with consistent monthly payments and no balloon payment at the end, an equipment loan is the way to go.
Equipment loans are a good choice for both startups and long-standing businesses when financing the purchase of equipment. With the equipment being used as collateral, qualification for these loans is usually easier than with other types of financing. Therefore, if a business is looking for a straightforward purchase of equipment with consistent payments, no balloon payment at the end, and transfer of ownership upon satisfaction, an equipment loan is the best choice.