Equipment loans provide financing for the acquisition of a piece of equipment to be used for your business. Whether it be machinery, industrial equipment, vehicles, computers, furniture, or other specialized equipment, they can help facilitate the purchase and allow you to sustainably pay it off over time.
They commonly have a fixed interest rate and have monthly principal and interest payments for the term of the loan. The asset acquired is used as collateral, and ownership is transferred to the borrower once the loan has been fully repaid.
Key takeaways
- Equipment loans are offered by banks, online lenders, or equipment manufacturers and financiers.
- The application process is simple, with the equipment being purchased acting as collateral.
- Equipment loans differ from equipment leases in that ownership is assumed at the end of the loan term instead of leasing an asset that is borrowed and returned at the end of the lease term.
How Do Equipment Loans Work
Equipment loans are facilitated by a lender to provide equipment financing for the purchase of an asset for a business. You’ll have to submit a loan application (this is a standard process of collecting your personal and business information) to evaluate your eligibility for the requested loan. The overall process may vary among lenders:
- Step 1: Submit a loan application. Some information requested will be about the type of equipment and financing you’re seeking, along with business history and personal and business financials. You may need to supply further documentation if sought by the lender.
- Step 2: Review the loan agreement. If approved, you’ll be presented with a loan agreement that defines the terms and conditions of the proposed loan. After disbursement, which usually takes one to three days, you’ll then be able to purchase the equipment, whether the loan funds are disbursed directly to you or the vendor.
- Step 3: Pledge collateral. The lender will use the equipment purchased as collateral to secure the loan and will file a lien against the asset. Usually, this is done via a Uniform Commercial Code (UCC) filing, which in the event of default allows the lender to seize possession of the asset.
- Step 4: Begin repayment of the loan. Loan payments will then be made for the term of the loan, which can typically range anywhere from two to five years. These payments are made monthly and are usually structured with a fixed interest rate. Once the loan has been repaid in full, the lien is removed by the lender and full ownership of the asset will be transferred to the borrower.
Rates & Terms of Equipment Loans
Typical Equipment Loan | |
|---|---|
Interest Rates | Generally ranges from 7% to 20%+ |
Loan Amount | Depends on the lender and equipment type |
Collateral | Asset acquired serves as collateral |
Repayment Period | Generally anywhere from 1 to 10 years |
Downpayment | 0% to 20% |
Disbursement Time | Usually 1 to 7 days |
Pros & Cons of Equipment Loans
| Pros | Cons |
|---|---|
| Can help you finance a large purchase if you don’t have the budget | May require a downpayment, which can be costly depending on the asset |
| Offers eventual ownership of assets purchased | May require you to pay more overall due to accumulated interest and fees |
| Can provide opportunities to grow your business and fulfill operations | Limits loan funds to assistance in equipment-type purchases |
Who an Equipment Loan Is Right For
Businesses in all industries are likely to have to use some form of equipment to perform operations. An equipment loan can benefit businesses of all shapes and sizes, especially those looking to finance a piece of equipment that they can eventually own and will last a long while.
You should consider an equipment loan if you:
- Want to finance a large purchase: Instead of paying out of pocket for an asset, an equipment loan can provide you with longer repayment terms, usually with a favorable fixed interest rate that makes for easier monthly payments.
- Don’t have the budget to purchase an asset out of pocket: If you are a new small or startup business, you may lack the resources necessary to make such a large investment. An equipment loan can bridge the gap and help build your business credit.
- Are acquiring equipment that will benefit your business: Equipment can be costly, so if you know that a piece of equipment will benefit your business and can still be utilized long-term, it may be worth the investment.
- Need equipment with a long useful life: A useful life calculates how long an asset can be profitably utilized. Since you will eventually assume ownership of the equipment purchased, you want to ensure it can still be used long after loan payoff and will not depreciate in value.
- Already own equipment and need collateral: If you are already in possession of an expensive piece of equipment and own it outright, you can use it as collateral to secure another loan.
Qualifying for an Equipment Loan
Lender requirements will vary when it comes to qualifying for an equipment loan. While each may evaluate your application differently, there are a few common factors that they take into consideration:
- Credit score: Lenders will want to see a strong business credit score to show that you’re a responsible borrower with a history of making payments on time.
- Personal finances: In some cases, lenders may request a personal guarantee to supplement the collateral of the loan. They may ask for records of your personal income and check your credit score.
- Business finances: Along with your application, you’ll likely need to provide financial documents in regard to your business. These can include cash flow statements, tax returns, balance sheets, and profit and loss statements.
- Time in business: Continuing with the overall credibility of your business, lenders want to ensure your business operations have been profitable over time. They usually seek businesses that have been operating for six or more months, although this is not always a requirement.
- Value of equipment: Down payments are usually required for an equipment loan, and a lender may calculate what’s owed based on your creditworthiness and the price of the equipment. The standard down payment ranges anywhere from 0% to 20%.
Where To Get an Equipment Loan
When choosing a lender, you’ll need to find one that offers equipment loans best suited to your business needs:
- Local bank or credit union: They usually offer a variety of loan types for small businesses. Oftentimes, you can get more favorable terms if you meet their eligibility criteria. Keep in mind, local institutions often have more rigid qualification requirements, but it can be to your benefit in getting lower interest rates and fewer fees.
- Online lender: This is another provider that can facilitate an equipment loan, offered to businesses of all sizes and financial status. It usually offers quicker and more flexible access to funds. That being said, interest rates can sometimes be a bit higher and include various fees.
- The asset’s manufacturer: Manufacturers often have financing options available. You may be able to negotiate terms, such as price and rate, when approaching them. However, what you may gain in convenience, you may lose to higher rates and fees overall. The same can be said of some equipment financing companies that also offer ease and accessibility but usually structure their loans with higher rates and fees.
Alternatives to Equipment Loans
If you think an equipment loan might not be the right fit for your business, there are quite a few options you can explore:
- Equipment leasing: If you plan on using an asset only for a short period, then equipment leasing may be a more cost-effective option. You won’t need to worry about ownership responsibilities or a large down payment. Our top-recommended equipment leasing companies can help you find a lender that fits the bill.
- Small business loan: This would be a good alternative if you need access to funds for more than just equipment acquisition, as there are various small business loan types available. For guidance on the process, see our article on how to get a small business loan.
- Business line of credit: Business lines of credit rarely have restrictions on what you can purchase, providing a quick and flexible way to access funds for a variety of business expenses. Keep in mind this is generally more suitable for short-term financing, so budget accordingly. Check out our guide to the best small business lines of credit for options.
- Small Business Administration (SBA) loan: SBA loans are small business loans that are partly guaranteed by the government and offer lower interest rates.
- Business credit card: Similar to a line of credit, you can use a business credit card to make a purchase directly on an as-needed basis and pay it off over time. For our recommendations, see our roundup of the leading small business credit cards.
- Business auto loan: You can use a business auto loan to specifically finance a vehicle, even though it can also be considered for an equipment loan. Business auto loan providers may offer a deal if you finance directly through them. Our list of the top business auto loan providers is a good place to start.
Frequently Asked Questions (FAQs)
An equipment loan applies to a wide variety of assets, such as industry-specific machinery, vehicles, furniture, information technology (IT) equipment, phone systems, and printers.
Rates can vary depending on the lender and your credit but range anywhere from 7% to 20%.
Businesses of all types can use an equipment loan, whether it be used for their offices, restaurants, industrial projects, medical facilities, or something similar.
Bottom Line
Equipment loans can help your business acquire an asset that otherwise may be out of your budget and finance it in a sustainable way. They’re an accessible funding source for small and startup businesses, with the equipment purchased acting as collateral, and are therefore suitable for businesses with a limited portfolio. You’ll also be able to eventually own the asset, which can provide further business opportunities.
