Equipment Financing: Best Business Loan Options

What is equipment financing?

With equipment financing, the loan amount you qualify for depends on the value of the equipment you are purchasing. The equipment also serves as collateral for the loan, so the lender can seize it if you fail to repay the loan.

Traditional banks typically offer the most favorable interest rates and terms, but they have strict credit standards. Online small-business lenders are another equipment financing option, especially if you need to purchase equipment quickly or if your personal and business finances aren’t in excellent shape.

The size of the loan should match the price of the equipment you’re purchasing, while the loan term should match how long you expect to use the new equipment. If you’re buying commercial ovens that you expect to use for 10 years years, get a loan with a 10-year term. A shorter term may have you scrambling to make payments, and a longer term means you’ll be paying for the equipment after you stop using it.

Some lenders may require an equipment loan to finance heavy-duty vehicles, whereas others offer business auto loans or semi truck financing to cover such purchases. Compare options to find the best fit for your business.

Equipment financing interest rates

Equipment loan interest rates are typically between 8% and 30%. Where your rate will fall in that range depends on your credit score, business revenue and time in business, as well as the equipment you’re financing.

Established businesses with excellent financials could secure a rate below 8%, for example. While startups and business owners with bad credit (a FICO score between 300 and 629) will likely have a higher interest rate.

Equipment financing pros and cons

The main benefit of financing large equipment purchases is that it leaves working capital free for day-to-day operations. But there are other things to consider, such as the length of the loan and whether you’ll need a down payment. Here are some pros and cons to consider:

• An equipment loan is usually the financing option with the lowest interest rate.
• You’ll own the equipment outright. Once the loan is repaid, business owners who own equipment but need cash for other business purposes may opt to arrange a sale-and-leaseback agreement. This involves selling equipment to a lender in return for quick cash and then leasing it from that lender.
• At tax time, the interest you’ve paid is deductible, and you’ll also enjoy a depreciation tax benefit.

• If the financed equipment becomes outdated, you’ll need to sell or dispose of it.
• An equipment loan may require a high initial down payment.

Many vendors offer leasing as a financing alternative.

Equipment leasing can help reduce costs and maximize an investment. For instance, a piece of equipment becomes less valuable and productive as it gets older, so leasing it for a limited time may be a smart move.

Some financing companies also offer the option of buying the equipment at current market value.

Leasing generally is more costly than buying if you end up using the equipment for a long time. According to the Equipment Leasing and Finance Association, leasing is “likely the preferable option” for equipment you plan to use for 36 months or less. If you’ll use it for longer, it makes more sense to buy.