- Small businesses that need funding to pay for equipment can consider an equipment line of credit.
- Unlike a traditional small business loan, a business line of credit allows the borrower to only pay interest on the amount they use.
- Borrowers can also re-use the credit once they pay it off.
What is an Equipment Line of Credit?
An equipment line of credit is a small business loan that allows you to only pay interest on what you use. It also allows you to re-use the credit after you’ve paid it off. Instead of getting a lump sum, you have a pre-approved spending limit that can be used whenever you need it, much like a credit card.
Using a line of credit to finance your equipment can be a great option compared to a traditional small business loan for a number of reasons:
- You can reuse the financing. Unlike many loans, a line of credit is “revolving,” which means you can access it again after you pay it off.
- The interest doesn’t accrue immediately. Unlike many loans, where you have to pay back the set interest rate with each monthly payment, a line of credit only accrues interest on what you use.
Pros and Cons of Equipment Financing
There are a few pros and cons of using financing for buying or leasing your business equipment.
- Helps keep cash flow open. Purchasing, repairing, or leasing equipment can be expensive for any business owner. By using financing to purchase or repair equipment, you can spread out the cost of the equipment purchase and pay it back in monthly installments rather than taking a big chunk out of your working capital.
- Helps you grow your business today. By using equipment financing to buy or repair equipment, you help your business grow now
- No need for collateral. In general, the lender will not require collateral, down payments, or personal guarantees to give you an equipment loan or line of credit. In fact, the equipment itself will act as collateral if you are unable to pay back the loan or credit.
- Helps you grow your business today. By using equipment financing to buy or repair equipment, you help your business grow now.
- You can only use it for equipment. While equipment financing will open up working capital in other areas of your business operations, you can’t use the financing on anything other than equipment.
- Equipment financing may be more expensive. Depending on factors like your credit score, you may pay more in interest rates than you would if you paid in cash or leased the equipment.
- You own the equipment. Owning equipment means you’re responsible for its repair and upkeep, as well as selling it if you want to upgrade or leave the business. This may not be a con for every small business owner, but it’s something to keep in mind.
- You may need to have a downpayment. If you opt for an equipment loan, you may need a substantial down payment in order to qualify for the loan, depending on which equipment financing lenders you apply with.
Should Your Business Lease or Finance Equipment?
There is an alternative to purchasing equipment outright either with your own money or through financing: Leasing.
With equipment leasing, you rent the equipment from a provider or manufacturer for a contracted period of time. At the end of the lease, you either own the equipment or return it. Similar to equipment financing, leasing lets you spread out the cost of the equipment over a longer period of time rather than paying in a lump sum at the beginning.
Other advantages of leasing equipment include:
- Maintenance and repairs are up to the equipment owner
- You may be able to upgrade your equipment more easily than if you owned it outright, giving you more flexibility
- Gives you more flexibility than financing with multiple leasing contract options and timeframes
- Quicker approval than traditional financing
- Easier to get with bad credit than equipment financing because it’s less risky for the lender
To choose between equipment financing and lending, consider the type of equipment you’re trying to get and your business needs. If you’re starting a new business and want to get new equipment, leasing might be a better option than financing because you’re more likely to qualify with little to no business history, especially if you don’t have good business credit or a good personal credit score.
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What Does Your Business Need to Qualify For Equipment Financing?
The types of loans available to you will depend on a number of factors. As with any type of financing, you’re going to need to meet a handful of requirements in order to qualify for equipment financing:
- Credit history. You’ll need both your business credit and personal credit scores in order to qualify for a term loan, line of credit, or other types of financing. Online lenders may accept lower credit scores than traditional banks or credit unions, but this may mean higher interest rates or shorter loan terms. Not sure about your business credit score? Learn how to establish business credit and improve it to get better odds of qualifying.
- Years in business. Traditional lenders and Small Business Administration (SBA) lenders will probably want to see that you have several years in business in order to approve your financing. Alternative and online lenders may be willing to forego this in exchange for higher interest rates and shorter payback terms. You may also look into small business start up loans that have less rigid requirements for years in business.
- Financials. Make sure you have your tax returns, proof of annual revenue, bank statements, and other financial statements ready when you apply for a bank loan or other type of business funding. These will help the lender determine your risk level, which also determines your eligibility , loan amount, and repayment terms.
Equipment Loans Interest Rates and Terms
Equipment loan interest rates and terms vary depending on which lender you opt for, as well as your credit score, years in business, and other factors.
With good credit, you may be able to qualify for a loan at 5% interest with a 10-year repayment term. With a lower minimum credit score, a short-term loan may be more likely. Interest rates can go as high as 30%, which may not be worth it, depending on the piece of equipment you’re financing.
How To Finance Your Business Equipment
There are a number of ways to finance your business equipment, depending on your business needs:
- Traditional equipment loans from banks or credit unions
- SBA loans
- Online lenders
- Equipment lines of credit
- Small business credit cards
- Paying in cash
Industries That Use Equipment Financing
You can find equipment financing in any industry that uses equipment, such as:
- Transportation, such as semi trucks, vans, and fleets of vehicles
- Agriculture, such as farming equipment and animal control equipment
- Healthcare, including dentistry and other medical specialities
- Restaurants, including kitchen gear like ovens and stoves
- Manufacturing, including heavy equipment for producing factories
- Construction, including demolition equipment and other equipment
Where Can You Get an Equipment Line of Credit?
This list of equipment financing options is a good place to start to find an equipment line of credit or other equipment financing. A few line of credit options you may consider include:
To find the best equipment financing, it’s a good idea to know your business and personal credit scores, as well as what you’re likely to qualify for. Nav can help you find your best options based on your business data. Sign up for a free Nav account to see your equipment financing options and other small business loans today.
This article was originally written on June 30, 2022.
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