Business Equipment Loan-101 Guide

Published October 13, 2020 by WC Team

Starting a business is quite a tedious job and becomes stressful when you have weak finances. Running a business with proper tools and equipment attains more profit. However, you need good capital to initiate the business.

Not everyone has the funds to start or extend business and invest in tools. Procuring these tools and finances becomes easy when you opt for a business equipment loan. Many businesses derive these loans through banks and other financial institutions. 

All the businesses need a wide array of equipment and services to fulfill their respective commitments. Various tools like computers, secondary devices, servers, and networks are all very important for the business to grow today.

Abusiness equipment loan will help to achieve all the tools without any loss or hassle.

What Is A Business Equipment Loan?

The business equipment is any tool involved with a computer, telecommunication devices or several other essential things needed while starting or growing a business. The financing necessary to obtain this equipment when there is less or no cash is termed a business equipment loan.

Often, Small business owners resort to the equipment loan and are bound to give a down payment of 10-30%. The loan lender funds the remaining amount to the owner. 

In some cases, the loan provider agrees to finance the complete budget of the equipment. The only drawback is that the cost expected is higher.

The equipment loan differs from the conventional bank loan so that it doesn't require you to place any guarantee to acquire a business equipment loan. If you are incapable of repaying the debt, the provider can ask you to return the equipment to cover up for the incurred losses.

Certain high professional lenders entirely finance one type of business, such as construction business, communication sector, and many more. Sticking to only one type of business gives them a better insight into the equipment used prices.

Essential Parameters to Obtain A Business Equipment Loan

Before you go for any type of business equipment loan, consider the following factors.

Loan Providers pursuit

Some lenders only focus on a specific type of equipment loan. You should make sure you are getting the funds from the correct loan provider. If you run a construction company, avoid utilizing the loan from a lender specializing in restaurant equipment.

Equipment qualification details

Every lender has a certain set of conditions that they impose on the debtors. There are specific criteria that are considered before sanctioning the loan. Minimum credit score and minimum time in business are the two major aspects of the expected loan.

For example, some equipment lenders require the credit score of a borrower to be 700, whereas some other lenders would be willing to lend it for a credit score of 600 or less.

In addition to that, lenders look out for the period for which the company is active to determine the loan qualification. Some providers are completely okay with the company being in business for 6 months; however, another lender would want the company to be in the market for a year or more. 

Apart from this, the lenders also lookout for the company's total revenue every year. Some compliant lenders agree on the annual revenue of $20,000, while others want you to generate a whooping sum of $500,000 per year.

Loan sizing

Depending on the qualification, the lenders decide what amount to deliver to the borrower. Some lenders are comfortable providing only $10,000 for the equipment, while others may give a total of $1 million.

The loan size and the variety of equipment have a major impact on the issued equipment loan or equipment financing. 

Interest charged

Equipment loans have a set rate of interests that range between 7-20% per annum. However, make sure to check the interest rates before signing in for a loan. You do not want to pay any interest that will be more than the actual sum taken. 

Funding speed

Loan financers take about 4-5 business days before funding any small business equipment. However, financing the small business administration (SBA) may require a couple of weeks. Some equipment finance lenders offer “pre-funding,” and that’s a fast way to get your equipment vendor paid before the equipment is actually delivered. 

Loan repayment term

Always look for the loan terms that work in harmony with your annual revenue. Many lenders would provide you a decent time to repay the loan. But some lenders expect you to return it in a year or half. It’s typical that an equipment lessor or equipment leasing company will allow a payback period of three to five years.

You can choose the criteria responsible for the acceptance of a business equipment loan. Once you are sure of a loan, go forward with the application process.

Companies Offering Business Equipment Loan

All types of businesses can utilize the equipment loan. Certain industries providing these are given below-

Restaurants

Huge deep freezers, refrigerators, ovens, deep fryers, and grills need finance equipment when improvising the kitchen area.

Construction industries

These companies use the equipment loan to buy trucks, bulldozers, cranes, excavators, backhoes, and other high-tech machinery to build residential houses and commercial buildings.

ITindustry

This sector would invest more in tech-related stuff like computers, software, servers, wiring, hardware, and cooling system. These are experienced and asked for the industry.

Agricultural business

This industry focuses on equipment loans to procure plowing tools, tractors, plows, sprinklers, winning machines, and many more.

Shipping industry

The shipping department of a company would expect a loan to buy more trucks and transporting gadgets. They will also need materials such as carton boxes, protective bubble wrap, masking tape, and more.

Medical centers

These places would require to expand more facilities like adding in new medical equipment. The tools are an x-ray machine, sonogram, electrograph, and other surgical tools.

Content creative agencies

This sector is in association with the digital marketing agency. The equipment includes scanners, hardware, reliable software, printers, and video shooting and editing devices.

The equipment loans never fail to surprise the borrower with the variety of perks it offers. 

Advantages of A Business Equipment Loan

With no collateral, a business equipment loan is what everybody should look out for. Here are some of the advantages that make it a better option than general loan services.

Easily attainable

The equipment loans are accessible to many industries, be it a small business or large-scale business. If your application is accepted, then the loan will be approved quickly.

Less paperwork

When compared to the traditional loan procedure, the equipment loans require fewer documents and paperwork. This relieves the stress of creating heavy documentation.

Increase competition

More money means you can involve yourself in the business rat race to achieve more efficiency. This will help you to attain more revenue.

Equipment is an asset

In a business equipment loan, the equipment you buy can be used as a collateral/ asset by the lender. The balance sheet, however, shows no rules about the equipment procured on lease.

Gain tax rewards

Equipment loans deliver tax bonuses to the debtors. According to section 109 of the IRS tax code, the business can deduct the value of the machinery used.

Disadvantages of Business Equipment Loan

As good as they seem, equipment loans do come with some drawbacks.

Uncertainty in reaching the goal

It is quite possible that the equipment you attain will not be able to fulfill your aim. Many things go out of the way while constructing the business.

Low revenue effects

The lender demands a certain revenue that has to be considered while issuing the loan. If the annual revenue steps down due to an economic crisis or a pandemic, the lender could withdraw its support. This would largely affect the business situation in the market. 

Not utilizing the equipment

You can never be entirely sure about the equipment you purchase would be used completely and for a prolonged period. If you do not like it, you would still have to cover up for its cost and the interest fees. 

More down payment

To initiate the loan, a down payment is essential. The lender can ask for any percent of the total issued loan. However, if the amount exceeds your budget, then the loan cannot be obtained. The interest rates can also go wrong if the lender isn’t complying.

Business equipment loan: Pros and Cons

Pros

  • Hassle-free loan service
  • Quick funding
  • No need for collateral
  • Incentives on taxes

Cons

  • Not utilizing the equipment 
  • More down payment
  • Expensive for hefty loans
  • Maintaining a credit score
  • Huge interests

Summing up

Equipment loans usually cost low for long terms. You do not have to necessarily purchase the equipment for using it. So, there is no harm in procuring an equipment loan for the new gadgets you might want to upgrade.

In addition to that, there are individual sectors for all types of loans. The professionals in the loan provider company can guide you through the best equipment to invest in.

In short, the equipment loan is a much better option than the traditional loans from the banks as it is easily accessible. All the factors as mentioned above are the prime ones to be considered regarding the business equipment loan. Browse through a couple of options before selecting any lender and invest smart!

Are you a business owner? Apply for financing. Start Now.

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