Equipment Financing

What is Equipment Financing and How Does it Actually Work?

No matter what industry you’re in, you’ll need certain equipment to conduct business. Whether the tools of your trade are a standing desk, a computer, and an array of monitors or you need a specialized work truck decked out for mobile welding, purchasing everything you need to keep your business growing can put a financial strain on even the most successful of small businesses.

One way to mitigate the impact of major equipment purchases is through equipment financing. Is equipment financing worth it in the long run? Read on to find out.

How can small business owners benefit from equipment financing?

Buying everything to run your business upfront will get expensive fast. It’s probably no surprise that the gleaming, specialized equipment found in your dentist’s office can cost nearly $200,000, but even the equipment necessary to open up a small coffee shop can cost $40,000 or more. These price tags are often a major hurdle for aspiring business owners, but they don’t have to be.

Equipment financing gives you access to a lump sum of money ranging from $5,000 for a new point of sale (POS) system all the way up to $5 million for construction equipment, advanced manufacturing machinery, and more. When you utilize equipment financing, you can expect to pay back the purchase over a span of one to five years, and at an interest rate as low as 7.5%.

Is equipment financing a good option for you? It’s worth considering if:

• A piece of equipment could offer a major boost to revenue, but the upfront cost prevents you from purchasing it outright.
• Your business is expanding, and you need office supplies and equipment to jumpstart a new location.
• You can afford new equipment without financing, but the purchase would hamper future growth by putting a strain on your working capital.

Say you opened up a food truck and customers can’t get enough of your gourmet grilled cheeses. Your restaurant is a hot commodity for breweries, music venues, and riverside parks, but even though it’s on wheels, you can still only be in one place at a time. If you wanted to purchase another truck on your own, you might be saving up for years before you can make that dream a reality. By relying on equipment financing, you can purchase a second truck and kitchen equipment and start reaping the benefits of a second revenue stream right away. In one to five years, you’ll own that truck outright, and you might even start looking at expanding to neighboring towns and cities.

Can equipment financing be the wrong choice? Definitely, if:

• You finance new equipment for a term that’s far longer than the useful life of the tool.
• The new equipment won’t add more value to your business than it will cost in terms of financing.
• You could use another financing option that’s available at a lower rate.

When financing a significant expense, many business owners are tempted to draw out the term length as long as possible. While this tactic will indeed lower your monthly payments, it also increases the amount you’re paying in interest over the life of the loan. In addition, you never want to be paying for equipment past its anticipated useful lifespan. As a rule of thumb, if you’re paying for equipment financing, that equipment should be paying you in increased revenue and higher profits!

Qualifications for equipment financing

How to qualify for equipment financing

If you’re interested in seeing if you qualify for equipment financing, the good news is that it’s relatively easy compared to more stringent or competitive alternatives such as SBA loans. Because the equipment itself can serve as collateral, you won’t typically have to put up your personal assets for that purpose.

Most lenders will want to see a 12-month record of business with annual revenues in the mid-five figures and up. While a credit score above 600 might be enough to get your foot in the door, a higher score could land you a lower rate, saving you potentially hundreds in monthly payments and thousands or tens of thousands over the life of the loan.

Pros and cons of equipment financing.

Equipment financing can be a useful tool to help support a business during a variety of stages, but it has a few pros and cons you should consider before making a decision:

Thanks to its broad applicability and the potential to fund equipment purchases up to $5 million, equipment financing should at least be on the radar of financing options for any small business owner.

Our take on equipment financing

It’s a question we get asked almost every day: Is equipment financing a good option for my business? While taking on any debt requires careful consideration and no one knows your business better than you, here’s our take: Equipment financing is about helping you deliver more value, whether the equipment is processing customers through your store more quickly, manufacturing products more rapidly, or enabling you to tap into entirely new markets. Ultimately, if the value you’ll be able to produce with new equipment is expected to outweigh the cost of the equipment plus financing, it’s a good idea to at least get more information to help you form the most accurate picture possible.

Whatever you decide, filling out our loan application form will show you all the various financing options available to your small business. When you know what tools are available in your financial toolbox, you’ll be better prepared to meet any need that may arise.