What Is Equipment Financing?
Equipment financing is a type of business financing specifically intended to be used for business equipment. The term “equipment” includes virtually any physical item a business uses in the course of its operations, so it can be used for things like furniture, computers, ovens, vehicles, medical equipment, construction equipment, and other highly-specialized tools, just to name a few.
Pros and Cons of Equipment Financing
Many types of business loans require a borrower to have a valuable asset to be used as collateral to secure the loan. With equipment loans, the equipment itself serves as collateral so in most cases, the borrower does not need to provide anything else. This can be a big advantage to small businesses that might not be able to own the sorts of assets lenders typically look for to be used as collateral for loans.
Since equipment financing has built-in collateral, lenders can be more flexible about approving applicants. Your business credit score is less of a factor and lenders are more inclined to approve younger businesses that don’t have the years of experience that lenders look for with regular business loans. Applying for equipment financing requires much less paperwork than applying for a regular business loan, so the application and approval processes are usually pretty fast.
Equipment financing typically covers a significant percentage of the total price of the equipment. This allows business owners to get the equipment they need without having to face a huge up-front expense. In fact, many business owners who could pay for their equipment up front still choose to use equipment financing since it allows them to use that money to improve their business in other ways.
Terms for equipment financing are often rather flexible when compared to taking out a regular business loan. Equipment financing terms can last anywhere from a few months to over a decade, depending on the expected useful life of the equipment.
Equipment financing is not ideal for all types of equipment. If the equipment you’re interested in is something that will become obsolete or worn out by the time it’s paid off, equipment leasing may be a better option since it would prevent you from getting stuck with outdated equipment in the end.
Types of Equipment Financing
Many different types of loans can be used to cover equipment purchases, including merchant cash advances, invoice financing, and microloans. If you are a small business owner, another option you may want to consider is an SBA loan. Funds from 7(a) loans, which are backed by the SBA, can be used for a wide variety of business expenses, including purchasing equipment. Businesses who are looking to make larger investments or purchase particularly expensive pieces of equipment may be interested in another type of SBA loan called a CDC/504 loan.
The Difference Between Equipment Financing and Equipment Leasing
The terms “equipment financing” and “equipment leasing” are sometimes used interchangeably, but be aware they aren’t exactly the same things. Equipment financing allows you to own the equipment at the end of the term, but with equipment leasing, you simply make monthly payments for the ability to use the equipment for a set amount of time. This makes leasing a more cost-effective option for equipment you only have a temporary need for or would become obsolete by the time it’s paid off. Equipment financing is better suited for equipment that is crucial to your long-term business operations.
Applying for Equipment Financing
Although equipment loans are generally more attainable for many businesses than traditional business loans are, lenders will still want to see that your business is capable of turning a profit and that your new equipment will help your business in the long run. When you apply, be expected to supply things like:
- Past bank statements and business tax returns
- Your resume and resumes for your partners and other essential employees
- A copy of your driver’s license or other government-issued identification
- P&L statements
- Your business license or certification
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