Equipment Loans – How They Work & Where to Find One

Equipment loans help businesses finance equipment such as vehicles and heavy machinery and are secured by the asset being financed. Equipment loans are available from a variety of providers, including traditional banks and alternative lenders. Rates typically range from 6% to 9%, depending on qualifications, and lenders generally charge origination fees between 1% and 3%.

Where to Get an Equipment Loan

Providers of business equipment loans range from traditional banks to alternative lenders, as well as “in-house” financing, offered directly by the manufacturer potentially at lower interest rates and with additional incentives. Which option you choose will depend on the type of equipment you are financing, your qualifications, as well as the equipment you are financing.

Equipment Loan Providers

Here are five providers to consider when you need an equipment loan:

Crest Capital

Crest Capital is an alternative lender known for its competitive interest rates as well as its flexibility and experience in financing equipment of all types, new or used. Crest Capital also provides equipment loans and leasing for equipment manufacturers as an “in-house” lender.

Borrowers with at least two years in business and a 620 or better credit score should consider using Crest Capital, especially if you need to finance any soft costs such as training or installation. As a bonus, Crest Capital does not require any minimum annual revenue to qualify.

Wells Fargo

Wells Fargo is a very well-known national bank and business lender. Wells Fargo is a reputable provider of business credit products, including Small Business Administration (SBA) loans, business credit cards, lines, and equipment financing.

Borrowers who need up to $100,000 can take advantage of Wells Fargo’s Equipment Express loan, which offers low interest rates and relatively quick approval and funding turnaround times. Also of note, Wells Fargo will waive an up-front documentary fee and give a 0.25% discount on interest rates for borrowers who also sign up for a qualifying business checking account and auto-draft payments.

National Funding

National Funding is an equipment financing company known for having flexible qualification criteria and their quick funding available as soon as the next business day, making them an excellent fit for borrowers that need fast business loans. National Funding also offers application only financing up to $150,000 and same-day approvals.

Business owners with a 620 credit score or higher and at least six months in business should consider National Funding for their equipment financing needs. National Funding will also generally want to see at least $100,000 in annual revenue.

Smarter Finance

Smarter Finance is another lender that offers equipment financing and stands out from the pack for their willingness to work with startups, while still offering flexible lending options and competitive rates.

Borrowers who are financing equipment for a startup should consider Smarter Finance. To gain access to funding, you will need to be able to put down at least 10% of the total equipment cost up front and have a credit score of 650 or better.

BlueVine

BlueVine is an alternative lender known for its flexible lending options and relaxed qualification criteria. BlueVine offers equipment financing, business lines of credit, as well as invoice factoring, allowing business owners quick access to multiple financing options with one lender.

Business owners with challenged credit that need financing for equipment, as well as other expenses, should consider a BlueVine line of credit, which borrowers can qualify for with a year in business, $100,000 in revenue, and a credit score of 600. BlueVine also offers invoice factoring starting at a 530 credit score.

How Equipment Loans Work

Small business equipment loans are made by a bank or equipment financing company to fund the purchase of a large piece of equipment. An equipment loan is typically used by small businesses looking to preserve cash by taking the cost of the equipment and spreading it out in equal payments. Equipment loans can be used to replace existing equipment, refinance equipment, or to purchase new equipment as your small business grows.

Equipment loans are generally used to purchase assets that will retain their value, such as:

• Commercial vehicles: Vehicles, including semi-trucks, box trucks, and vans.
• Heavy machinery: Farm equipment such as tractors, manufacturing equipment such as plate rolling machines and computer numerical control (CNC) machines, and construction equipment like cranes and cement mixers.
• Specialized equipment: Medical equipment such as x-ray machines and diagnostic machines.
• Other equipment: Restaurant equipment such as ovens and ranges, and professional equipment like commercial printers, and computer servers.

Equipment Loan Rates & Terms

Equipment loan interest rates typically range between 6% and 9% for well-qualified borrowers, while rates topping out around 30% are available through some subprime lending programs. Typical equipment loan terms are between two and seven years, with terms of 10 years available for certain equipment.

Equipment Loan Rates, Terms & Qualifications

Equipment loan rates and terms include:

• Interest rate: 6% to 30%
• Loan term: 2 to 10 years

Rates range from 6% for prime borrowers to 16% or higher for borrowers with bad credit or little time in business. It’s important to consider the equipment’s interest rate when determining if the return on a piece of equipment is worth the financial burden. Rates above 20% may make it difficult to earn enough from the equipment to justify the purchase.

The loan terms are ultimately determined by the useful life of the equipment but can range between two and ten years. Most business equipment loans fall in the two- to seven-year range, and loans generally do not exceed the predicted life of the equipment. This benefits both you and the bank. You don’t want to be making payments on a piece of equipment after it has been retired.

Smarter Finance USA offers small businesses competitive rates on new or used equipment. If you have a credit score above 600 and have 5%+ as a down payment, you may qualify for up to $250K in quick, hassle-free equipment funding.

Visit Smarter Finance USA

Equipment Loan Qualifications

You will need to meet certain before a lender considers you for an equipment loan. Among these are your credit score, down payment amount, years in business, and annual revenue. Many lenders will also require a Uniform Commercial Code (UCC) lien. However, this is not always required, and not all UCC liens are alike.

Your loan provider will generally require that you have been in business between six months and two years, as well as meet minimum revenue requirements before you are approved for most forms of financing. It is possible to qualify for an equipment loan as a startup though you’ll need to meet stricter down payment and personal credit score requirements.

Some of the typical qualifications you can expect for an equipment loan are:

• Credit score: Minimum credit score of 550 to 640
• Down payment: 5% to 20% for borrowers with good credit
• Years in business: 6 months to 2 years
• Annual revenue: $25,000 to $150,000
• UCC filing: Many lenders will require a UCC filing

Your personal credit score is one of the most important factors when obtaining an equipment loan, and many loan providers will want to see a minimum of at least 640, although some lenders will work with riskier credit profiles, down to the mid-500s. Also important is the amount of money you can put down, which can be between 5% and 20% for those with good credit, and as high as 50% if your credit is poor.

Another important factor for lenders is how long you have been in business, as well as your annual revenues for the last two years. Lenders will want to see businesses with at least two years in operations, although some lenders will work with businesses with as little as six months and some with startups. The less time in business you can show, the more risk you will present, so expect higher interest rates as well as a higher down payment requirement.

Finally, be aware that many lenders, especially alternative lenders, will require a UCC filing. This is additional protection for the lender that allows them unfettered access either to specific assets (used as collateral to secure the loan) or a blanket lien, which borrowers should be particularly wary of as they can signal to future lenders that your business is not a good risk.

Equipment Loan Tips

Three tips for securing an equipment loan are:

1. Know the Required Documentation for an Equipment Loan

In general, small business equipment loans will require less documentation than other forms of financing (such as an SBA loan), and many business equipment loans can be done “application only” up to a certain dollar value, meaning the lender requires no supporting documentation.

Some of the typical documentation that may be required for an equipment loan includes:

• Equipment invoice: Quote for the equipment, including soft costs
• Bank statements: Showing your business’s cash flow for up to three months
• Tax returns: Showing your business’s taxable income for up to the past three years
• Financial documents: Year to date profit & loss (P&L) statement and business balance sheet
• Other: Business licenses and other professional documentation may be required

In the case of an application only loan, your bank statements should show income sufficient to cover your current liabilities as well as the new loan payment. Lenders will want to see consistent income, and any dips in income will need to be explained. If the new loan payment exceeds the existing available income, lenders may also want an explanation of how much money is expected from the new equipment.

2. Know the Additional Costs of Your Equipment

This new equipment will come with its own expenses, such as maintenance, storage, wages, and insurance, and you will need to be able to speak to how it will cover its own added costs.

Some of the typical costs added with new equipment are:

• Insurance: Certain equipment will require additional business insurance to purchase and operate
• Maintenance: You will want to factor in wear and tear, repairs, and parts for your equipment
• Wages: You may need to hire a specialist, or someone certified to operate your new equipment
• Storage: You will want to think about where you will keep your equipment when it is not in use

Bringing on additional equipment can come with significant additional expense beyond the loan payment. Another concern business owners will want to consider is the expense should the equipment break down. Equipment breakdown coverage is an option business owners can consider in the event of malfunction or damage. Ultimately, if a breakdown will lead to a significant loss of revenue or delay in projects, this coverage may make sense.

3. Know How the Equipment Will Improve Your Bottom Line

In addition to understanding the costs that will come with a new piece of equipment, lenders want to know that the equipment will cover its own costs, as well as how it will add to your bottom line. You should be ready to discuss these factors together.

“Ideally, you should be able to convey the benefits the equipment will provide your business before applying. Benefits may include growing revenue or cutting costs – and the associated impact to revenues, expenses and profit. Quantifying those benefits will help a lender understand the transaction and can often help secure a more attractive lease or loan approval for your purchase.”
―Rob Misheloff, President, Smarter Finance USA

Alternatives to Equipment Loans

Some alternatives to small business equipment loans are SBA loans and equipment leases.

SBA Loans

An SBA loan is a type of loan that can be used for many business needs, including equipment. SBA loans are loans that are backed by the Small Business Association, and come with stiffer underwriting guidelines. The funding timeline for an equipment loan is anywhere from 24 hours to 30 days at most. A comparable SBA loan might have a funding timeline of between 60 and 90 days, or longer if purchasing a new business.

If you need to purchase a piece of equipment, as well as cover some soft costs like installation and delivery, and equipment loan is often the simplest and quickest way to accomplish this goal. However, if you need additional funding for inventory, operations, and other working capital in addition to your equipment purchase, an SBA loan may be a good option.

You’ll want to factor in the additional requirements of an SBA loan when considering using this method to finance your business. SBA lenders must fully collateralize the loan with your personal residence, if possible. There are stricter requirements for entry as well, such as experience in your industry, clean credit, and if you have any criminal convictions of a certain nature, an SBA loan is off the table.

Equipment Leases

Equipment financing refers to either an equipment loan or an equipment lease; the biggest difference being the ownership of the equipment as well as how it is treated from a tax and accounting standpoint. Which option you choose can be influenced by cost, monthly payments, and whether you intend to keep the equipment.

With an equipment loan, you will own the equipment outright by the end of the term, whereas with an equipment lease, you are effectively renting the equipment, with the ability to buy the equipment at the end of the lease term. There are several different types of equipment leases, differentiated by the size of the monthly payments and the option to buy the equipment at the end of the term.

The most common equipment leases are the $1 buyout, 10% option, and fair market value (FMV) lease. With the $1 buyout and 10% option, you can buy out the lease at the end of the term based on a predetermined amount. These act similar to ownership, and come with depreciation through Section 179, much like an equipment loan. An FMV lease gives you a choice to buy the equipment at the end of the term at FMV and is commonly used to lease equipment you don’t intend to keep.

Equipment Loan Benefits

Equipment loans come with a host of benefits, including the ability to spread the payments out over time as well as the benefits of ownership, including depreciation. Additionally, equipment loan payments are fully-amortized.

Some of the benefits of using an equipment loan are:

• Cash flow: Avoid spending all of your available cash at once
• Ownership: Maintain according to your own standards
• Depreciation: Take depreciation under Section 179
• Amortization: Payments are fully amortized, no balloon at the end

An equipment loan allows you to avoid spending a large amount all at once, freeing up your cash flow for other pressing needs. Even if you can afford the equipment outright, many business owners find it critical to have additional cash on hand for emergencies, as well as to cover operating costs during seasonal downturns.

Depreciation

With an equipment loan, you can choose how and where to maintain your equipment, whereas with a lease, you might be obligated to adhere to a specific schedule. An equipment loan allows you to take full advantage of equipment depreciation, including accelerated depreciation, using a Section 179 deduction. Keep in mind most equipment leases allow this as well, so you won’t want your decision to hinge solely on this benefit.

Finally, equipment loan payments are typically fully amortized, meaning there is no balloon payment at the end of the loan; you simply own the equipment after the last payment is made. You also may save money on interest by paying off the loan early, although you will want to check your equipment loan contract for the presence of prepayment penalties.

Equipment Lease Benefits

Equipment leases come with their own benefits, generally including lower payments and a smaller down payment, or potentially no down payment at all. Additionally, you can turn over equipment more frequently. Short-term leases may also allow you to avoid listing the debts and assets on your balance sheet.

Key benefits of an equipment lease include:

• Monthly payment: Typically lower compared to equipment loans
• Down payment: Generally lower, or not required
• Turnover: You can replace equipment more frequently
• Depreciation: Capital leases can be depreciated
• Ownership: Leases under 12 months are not listed as debt

Lower Cost

Most business owners pursue a lease for a specific reason: either they want a lower payment on the equipment, or they only intend to use the equipment for a short period of time before replacing it or moving on. Some equipment simply makes more sense to lease because it will be replaced so frequently.

Leases also typically come with smaller down payments, and it is possible to lease equipment with no money down, with good credit and strong revenue. Additionally, with a capital or finance lease, you can depreciate the equipment under Section 179, similar to an equipment loan.

No Ownership

If you plan to lease the equipment for a short period of time, less than 12 months, you can keep the lease off of your balance sheet. This can make your business appear more attractive to lenders, as you won’t have a listed liability and asset associated with the equipment. These accounting rules were recently updated by the FASB, so make sure you fully understand them and how they relate to you.

One thing that is often overlooked when choosing whether to finance with a lease or a loan is who is responsible for sales and property taxes.

“In some states, the lease of tangible property is subject to sales tax, and the seller may also charge you for assessed property tax. If you own the equipment, then the sales tax is booked and paid for upfront. You then owe any property tax that is assessed. While it seems like a lease may provide a benefit over a loan in this case, it really depends on what your county and state tax rules say.

“Typically, the costs are passed on to you either way, but your state’s rules may dictate when you have to pay it. This is something you shouldn’t gloss over when deciding which option is right for you because it can be a significant amount of money to a small business, and you need to be prepared for it when it’s due.”
―Jeffrey Schneider, EA, CTRS & Principal, SFS Tax & Accounting

You should consult your tax professional regarding these costs and the impact on your equipment purchase.

Which Equipment Financing Is Right for You?

You should take the advantages of each financing method into account when choosing between an equipment loan or an equipment lease for your next purchase. The type of equipment you are buying, the cost of the equipment, its expected lifespan, as well as your business’s cash flow, should all be influential in your decision.

You should also consider the stage your business is in and whether owning your assets as opposed to leasing them will help you with future financing.

“Something to keep in mind is that young and growing businesses don’t necessarily need the tax breaks some forms of equipment financing can provide. As a growing firm we’ve used equipment loans so that we can own the equipment. We’ve then used older equipment purchases as a way to fund future financing. Additional financing is easier when you have this extra amount of collateral.”
―Jordan Green, Owner, Jordan Green Productions

Bottom Line

Equipment loans can be helpful to businesses of all sizes looking to get access to small business financing for large equipment purchases. They can be easier to qualify for than traditional financing or SBA loans and generally fund much more quickly. You’ll want to consider a number of factors, such as the type of equipment and the costs when choosing between an equipment loan and alternatives.