Equipment loans can help small businesses finance large pieces of equipment like vehicles or heavy machinery. In this article, we’re going to cover what an equipment loan is, how it works, and where to get one. We’ll also discuss the differences between equipment loans and equipment leases so that you can choose the option that is right for your business.
How Equipment Loans Work
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 spreading out the cost of the equipment over many months or years.
In the table below we break down the basic equipment loan rates, qualifications, and other general terms.
Equipment Loan Rates, Terms, & Qualifications at a Glance
| Loan Amounts | |
| Rates | |
| Down Payment | |
| Credit Score | |
| Term Length | |
| Loan Collateral | (and a blanket UCC lien) |
Equipment Loans in Detail
Equipment loans are generally secured by the equipment that’s being purchased only, meaning you will not need to present the lender with additional collateral, like a home. Equipment loans can be used to replace existing equipment or to buy new equipment as your small business grows. In general, equipment loans are used to make large purchases of equipment that will retain its value, such as:
- Large vehicles, like semi trucks
- Farm equipment, like tractors
- Manufacturing equipment (i.e. plate rolling machines, laser cutting machines, band saws, etc..)
- Large commercial printers
- Healthcare equipment (i.e diagnostic machines, x-ray machines, infusion pumps, etc..)
- Large construction vehicles and equipment (i.e. mixer trucks, cranes, skid steers, etc..)
- Restaurant equipment, like ovens & ranges
- Computer servers
Equipment loans require less documentation than many other forms of financing (like an SBA loan), and you can typically get funded under one week. Unlike getting an equipment lease, with an equipment loan you actually buy the equipment and own it long term instead of turning it over to your lease provider at the end of your financing term. We’ll discuss the differences between equipment loans and equipment leases in more detail below.
Equipment Loan Rates & Terms
Interest rates on equipment loans typically fall between 6-9%. Small business owners with better credit scores and larger down payments can see lower interest rates. Borrowers with lower credit scores and less money to put down will likely see higher rates.
The typical repayment term for a non-SBA equipment loan is 1 – 5 years, but they can go as long as 10 years depending on the size of the purchase and shelf life of the equipment.
While prime borrowers can typically get the best rates and longest terms through an SBA loan or traditional bank loan, they take a long time to fund (30-90 days). Many financing companies can offer competitive rates on equipment loans and get you funded much quicker. This may be a good option if you plan on paying back the loan quickly (less than 1 year).
Smarter Finance USA is a great example of a financing company that can get you funded within 1 week. They offer equipment loans up to $100K with rates starting at 6% if you can put a minimum of 5% down and if your credit score is at least 600.
Equipment Loan Qualifications
Your loan provider may require you to be operating your business for a certain number of years, and have a certain level of revenues before they approve you for most forms of financing. However, typically you can qualify for an equipment loan even as a startup, by just meeting certain down payment and personal credit score requirements.
Down Payment: 5%+
While 5% may be the minimum down payment required, many loan providers will require a higher percentage, in the range of 10-20%. If you have a risky credit profile, or there isn’t a lot of data on your business because you’re a startup, then the loan provider may require a larger down payment. The largest down payment we’ve seen required for borrowers with bad credit is 50%.
Credit Score: 550+
Your personal credit score must also typically be at least 550 (check your credit for free), but many lenders will want it to be 660 or greater. There are some opportunities out there for borrowers with bad credit (even those borrowers recovering from bankruptcy) as well. Borrowers with distressed credit should expect to provide a higher down payment, carry a higher interest rate, and be offered a shorter repayment term.
You aren’t likely to get approved for equipment financing if you have an open bankruptcy or open child support collections.
Required Documentation
While getting a traditional loan can require a lot of time and documentation, an equipment loan is much easier. The typical documentation needed to be approved for an equipment loan includes:
- Basic personal and business information
- Invoice for the equipment (including soft costs, like installation and delivery)
- 3 months of business bank statements
That’s all that equipment financing companies, like Smarter Finance USA, will typically need to get you financed. Some providers may ask for additional documentation, which may include:
- Business Tax Returns (up to 3 years)
- Year to Date Profit & Loss Statement
- Year to Date Business Balance Sheet
- Proof of Business Licenses
Lenders will also expect you to be able to describe how the new equipment will improve your bottom line.
According to Chet Zeken, CLFP, President at Smarter Finance USA, “Before you apply you should have the knowledge to answer questions about your equipment. Know how much the equipment is going to make you and what the extra expenses are going to be surrounding that equipment. There will pretty much always be additional expenses to bringing on additional equipment into your business, and you should know what they are before you apply.”
Some examples of extra equipment expenses include:
- Insurance
- Equipment maintenance
- Spare parts
- Operator wages
- Equipment storage
The more prepared you are when you apply for your next equipment loan, the more likely you are to be approved and receive funding quickly.
Collateral Required for Equipment Loans
The equipment you’re financing will be used as collateral for the loan, and your loan provider will usually file a UCC lien on your business assets for the loan amount as well.
While the UCC lien could use your general business assets as collateral, the value of the equipment should be enough to satisfy what you owe after your down payment, in most cases. This is much better than other forms of financing that may require you to use your house or other personal assets as collateral for the loan.
Where to Get an Equipment Loan
Where you get an equipment loan will typically depend on how expensive the equipment is, how fast you need the loan, and what the equipment’s shelf life is likely to be. Here are the best places to get an equipment loan:
SBA Lender
For equipment with a price tag above $100K, business owners may want to consider an SBA loan to finance the equipment. SBA loan rates are very low and the repayment terms are usually 10 years. One of the drawbacks of an SBA loan is that generally takes at least 30-90 days to be funded.
Local Bank
Another option for you is the local bank you currently use for your business. Having a pre-existing relationship could get you access to the best interest rates with the lowest monthly payments. Again, the drawback is the length of time it can take for a traditional bank loan to fund, which can be 30 days or more.
Dealer
Another good option is to get financed directly from the dealer where you’re buying the equipment. The financing options available through the dealer will vary. It’s not uncommon to find dealers do not have financing options available for borrowers with less than perfect credit.
Equipment Financing Company
For smaller and faster equipment loans, or for a borrowing options with less demanding qualification requirements, business owners can work with equipment financing companies like Smarter Finance USA. They can help you get funded for up to $100K worth of equipment with as little as 5% down. Their approval and funding period typically takes less than a week.
Equipment Loans vs Equipment Leases
Equipment financing can refer to either an equipment loan or an equipment lease. The biggest difference between the two forms of financing concerns the ownership of the equipment, and how that ownership is reported on your business balance sheet and taxes.
An equipment lease is a form of financing where you pay a monthly payment for the use of the equipment. At the end of your financing term you surrender the equipment back to the financing company, unless you agree to purchase it for a lump sum at that time.
There are many different types of equipment leases that vary in how much you pay monthly and what your option is to purchase that equipment at the end of the lease. The most common are the 10% Option Lease, Fair Market Value Lease, and $1 Buyout Lease. You can learn more by reading our in-depth guide to equipment leases.
An equipment loan has less variations than a lease and means you’re borrowing money to purchase a piece of equipment by making monthly payments for a set period of time. It typically gives you full ownership throughout the loan term and you get to keep the equipment once you finish making all of your loan payments.
An equipment loan typically allows you to claim the equipment and its depreciation on your business’s books. Through section 179 of the federal tax code, you can claim the cost of your equipment in the year you buy it. That offers unique benefits to businesses looking to reduce a tax bill. Business owners preparing to sell their business may want to consider an equipment lease as it could allow you to keep the equipment debt off your balance sheet. We’re not tax professionals, and we suggest you contact a CPA or accounting professional to better understand the tax considerations of an equipment loan.
Some equipment leases, like the 10% Option Lease, work just like an equipment loan in terms of how you characterize the ownership of the equipment. These are considered equipment loans, and are not the leases we’re referring to in this article. You can learn more about all the different types of equipment leases by reading our equipment leasing guide.
Equipment Loan Benefits
In looking at the comparison between an equipment loan and lease, here are the most important benefits that an equipment loan brings to the discussion:
Equipment Ownership
With an equipment loan you own the equipment. If the equipment you’re financing has a long shelf life then this may be a perfect fit for you because you can keep the equipment after you’re done making payments on it. Once it’s paid off you can also use it as collateral for additional financing.
You Take the Depreciation
A loan gives you the right to take the depreciation on your books, which could benefit your taxes for the current year through Section 179 of the tax code (up to $500,000). We suggest you contact a tax professional for exact details of this benefit.
Fully Amortized Payments
With an equipment loan, you generally pay equal monthly payments until the equipment is paid off. Some leases may give you a right to purchase the equipment, but you may have to make a large lump sum payment at the end of your financing term to do so.
Equipment Lease Benefits
You should also consider an equipment lease, because it has many benefits which include:
Lower Payments
Payments depend on your credit profile, but an equipment lease typically will give you a lower monthly payment than an equipment loan.
No Downpayment
Many equipment leases don’t require you to pay anything down to start using the equipment. If you’re really cash strapped but need the equipment quickly, then this may be your best option.
Equipment Turnover
If you’re getting an equipment lease then you’re agreeing to replace your equipment at the end of the term. This is great if the equipment has a low shelf life, or if your cash flow is strong enough to support new equipment every few years.
No Ownership
It may benefit you more not to have the ownership, and debt, of the equipment on your balance sheet. If you’re getting ready to sell your business, or if you’re wanting additional financing later, then this may help you.
One thing that is often overlooked when choosing whether you want a lease or a loan is whether or not you’re responsible for the sales and property taxes. According to Jeffrey Schneider, EA, CTRS, & Principal at SFS Tax & Accounting, says:
“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.”
“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.”Speak with your tax professional about how these costs could impact your next equipment purchase.
Which Equipment Financing is Right for You?
The right choice between an equipment lease or an equipment loan depends on a lot of factors, such as:
- What type of equipment you’re buying
- How you want the equipment to show up on your books
- How much the equipment costs
- What the equipment’s potential shelf life is
- What your business cash flow looks like
Getting a handle on what stage your business is in will also give you a clearer view of what your choice should be. Jordan Green, small business owner of Jordan Green Productions, prefers getting a loan as a newer business. He says:
“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.”Bottom Line: Equipment Loans
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, like SBA loans, and take much less time to fund.
Smarter Finance USA provides small business with both equipment loans and leases. They will work with you to determine the best choice for your individual situation, and help you get approved and funded within a week. They offer up to $100K in financing. You may qualify if you have a 600+ credit score and a down payment of 5%+.
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