Many types of businesses need equipment and heavy machinery to run successfully. As a small business owner, you know just how crucial it can be to have the right equipment your company needs to operate on a daily basis. Yet you might not have the funds to pay for such large purchases, upgrades, or replacements outright — which is where loans for business equipment come in.
Learn what an equipment loan is, how to get it, and the best equipment financing options for you.
What Is an Equipment Loan?
Equipment loans are a form of business financing small business owners can use to purchase any type of equipment or machinery their business needs to operate at a profitable level. Whether your business requires office computers, printers, commercial appliances, company vehicles, or other specialized machinery, you may be able to take out a loan to secure the new equipment your company needs.
Perhaps one of the most attractive features of equipment financing is the fact that the equipment itself can often serve as collateral for the financing. This is potentially good for both the lender and the borrower.
From a lender’s standpoint, equipment financing poses less risk because the lender has a valuable asset it can seize and resell in the event a company fails to pay back the loan as agreed. As a business borrower, it’s nice not to have the requirement of putting up additional collateral to secure the loan, other than the actual equipment being financed.
How to Get Equipment Financing
Eligibility for equipment loans depends on which lender you’re applying to and your specific business circumstances. However, you typically need to have been in business for at least one year (so new businesses may have a hard time), be able to process credit card transactions from customers, and not have any prior bankruptcies on your record. Also, make sure your FICO score and your business credit score match the requirements of the equipment financing companies or lenders you’re applying to.
You may also need to provide a business plan and key financial information like tax returns, bank statements, or annual revenue reports before you’re able to secure equipment financing. Another common requirement on this type of loan is a larger down payment than some other loan options, so you may need to save up before you can make it through the approval process.
11 Best Equipment Loans 2022
Once you’ve made the decision that you are going to finance your company’s equipment purchase, you’ll need to find the right lender to approach for a loan. Below are several ways you can borrow money to purchase equipment for your business, each with a number of different financing companies to choose from.
If you’re looking for an affordable way to finance equipment, it’s hard to beat the interest rate you may be able to get with a traditional bank or a U.S. Small Business Administration (SBA) guaranteed loan from traditional financial institutions. SBA has a number of loan programs that can be used for a wide variety of business-related purposes including — you guessed it — the purchase of business equipment.
However, as attractive as the interest rates may be on SBA loans, the loans are also notorious for having very strict qualification standards. For example, if you’re applying for an SBA 7(a) loan, the agency’s most popular loan program, you’ll need a FICO SBSS Score of at least 140 or higher. Many lenders will require a score of at least 160. The FICO SBSS Score considers both your personal and business credit reports, so each will need to be in good shape to earn a decent score. You’ll also need to invest personal assets in the business and have enough working capital (aka more assets than liabilities) before you can expect an SBA lender to approve you for funding.
The SBA itself doesn’t issue business loans. Rather, the agency guarantees a portion of small business loans made by commercial lending institutions like a bank, credit union, and other lender. This reduces risk for loan providers and, in many cases, makes it easier for small businesses to qualify for affordable financing.
Are you looking for an SBA lender? Here are a few options to consider:
Non-bank loans, sometimes called alternative loans, are another possibility you may want to think about if you’re looking for ways to finance the purchase of business equipment. Non-bank loans tend to offer more flexibility and will often give you access to the funds you need much faster than SBA and other traditional commercial bank loans.
Just keep the following in mind. The borrowing flexibility that alternative lenders may offer you often comes at a price — namely higher interest rates and fees. Online lenders may make the process of taking out a small business loan easier, but higher rates and fees can quickly drive up your total equipment financing costs.
Considering an online lender for equipment financing? Here are a few options to compare:
Visit Nav for a list of more options for small business loans that you may qualify for.
Heavy equipment loan
Many of the small business equipment loans listed above may be used for heavy equipment purchases. However, there are some lenders and finance companies that specialize in heavy equipment loans as well.
If you’re searching specifically for heavy equipment financing, these lenders might be able to help:
Equipment loans for bad credit
When you have credit problems, trying to qualify for a business loan can be a challenge. A low business credit score or personal credit score can signal to lenders that loaning you money is risky. As a result, if you do find a lender that’s willing to approve your application, you’re likely to be charged a higher interest rate than you would if the condition of your credit were in better shape.
With bad credit, the term of your loan may also be shorter. A shorter loan term can be difficult to manage. It can translate into higher payments and even a more frequent payback schedule — sometimes with payments as often as weekly or daily, depending upon the lender.
The truth is that if you’re seeking a large loan amount to finance business equipment purchases, you may have a difficult time securing funding with bad credit. However, if you need to borrow a smaller amount and you’re comfortable with potentially higher interest rates and shorter payback terms, these options may be worth considering:
Business credit cards
Technically, you may be able to use business credit cards to finance the equipment you need to purchase for your company. But just because you can use a credit card to cover expensive business equipment purchases doesn’t mean you should. At the very least, you should count the cost upfront and be aware of the potential downsides to using a credit card to finance equipment purchases.
The first potential downside of using a business credit card to finance an equipment purchase is the cost. Credit cards — both personal and business — have notoriously high interest rates. In fact, even if with great scores, credit cards are often one of the most expensive ways to borrow money.
Another potential issue with using a credit card to finance expensive purchases that you can’t afford to pay off right away is the fact that a high credit card balance can drive your revolving utilization ratio upward. Revolving utilization describes how your credit card balance relates to your credit card limit. The more of your credit limit you use, the higher your revolving utilization rate climbs.
A high revolving utilization ratio is almost always bad for your personal credit scores. Even if you’re using a business credit card, some card issuers will report the account to the personal credit bureaus. If a highly utilized business credit card shows up on your personal credit reports, your personal credit scores are almost sure to suffer.
Not all business scoring models consider utilization. Dun & Bradstreet’s PAYDEX Score, for example, is based 100% on your payment history. However, other business scoring models, like FICO SBSS, do factor revolving utilization into your commercial credit score.
If you know you’ll have the cash to pay in full for an equipment purchase by your statement due date; however, using a credit card to pay can make sense. In this situation, a business credit card can offer you a convenient way to secure some very short-term, interest-free financing (again, assuming you pay in full by the due date). Plus, if your credit card offers rewards or cash back, using it to purchase equipment you’ll pay off by the due date may help you enjoy some valuable perks.
How Equipment Financing Works
When you get an equipment loan, you borrow the money to buy the equipment and then pay it back over time. You may be able to get an equipment loan for the entire purchase price of your new equipment, but this depends on the lender and your business details.
Some soft costs — like delivery, assembly, or other one-time expenses — may also be covered by equipment financing. The terms of your equipment financing loan will also be impacted by the depreciation and the estimated lifespan of your equipment.
Pros and Cons of Equipment Loans
- Potential for competitive interest rates and long terms
- You’ll own the equipment outright
- May not need an excellent credit score
- Interest paid is tax deductible
- Expensive equipment maintenance and upgrades
- Potentially high down payment required
Equipment Financing vs. Equipment Leasing
As you’re weighing equipment loan choices, don’t forget to consider the possibility of an equipment lease rather than an equipment loan. Many business owners who are struggling to qualify for an equipment loan based on cash flow or credit requirements may opt into an equipment lease, which is often easier to qualify for.
Where with equipment loans your business owns the piece of equipment and use it as collateral, your business does not own a leased piece of equipment. At the end of the lease, you may have the option to purchase the piece of equipment, renew the lease, or terminate the lease.
There are two types of equipment leases; operating leases and capital leases. Operating leases allow you to lease the equipment for a relatively low monthly payment and give you the option to purchase the equipment for its fair market value at the end of the lease.
Capital leases have a bit higher monthly payments and are structured more like a loan, except they won’t show up on your company’s balance sheet. At the end of the lease, you’ll have the option to purchase the equipment at a fraction of the price, at times as low as 10% of the original purchase price.
If you’re thinking about an equipment lease, the following two companies may be able to help:
How to Choose the Right Equipment Loan
There are several components to choosing the right equipment loan for your business. Here’s a look at three of the most important factors you should consider before you commit to a specific financing option.
1. Check your credit and understand which loans you’re likely to qualify for and which applications to avoid
It’s wise to start any financing search — equipment loans or otherwise — by seeking out loans that you’re likely to qualify for based on your credit and other factors. For example, if you can’t meet the minimum credit score requirement, you’re unlikely to qualify for an SBA loan. In this case, even though an SBA loan might be an affordable way to borrow, it won’t be the right fit for you.
A free Nav account is the simplest way to determine which loans you’re likely to qualify for and which loans you might not. Through your Nav account, not only can you access your personal credit and business credit (something you should always check before you apply for any type of financing), you can also view your approval odds for dozens of different business funding options.
And if you find information on one of your credit reports that’s incorrect, you can dispute credit errors with both the personal and the commercial credit reporting agencies.
2. Calculate which loan is the most affordable
Now that you’ve identified the financing options you’re most likely to qualify for, it’s a good idea to start comparing costs. Unfortunately, figuring out the most affordable equipment loans can be a bit more complicated than simply comparing interest rates. You need to understand the total cost of financing, including fees, if you want to make an accurate comparison.
3. Use an equipment loans calculator
One tool you can use to help you compare the overall cost of different equipment financing options is Nav’s Business Loan Calculator. To properly compare the total cost of different loans or equipment lease financing, you’ll need to gather the following information:
- The quoted interest rate
- Repayment term (typically one to five years)
- Any additional fees (origination fee, application fee, etc.)
4. Weigh other factors
It’s important to consider other factors that might be important to you when you’re choosing the best way to finance an equipment purchase for your company.
- Do you need access to funding quickly?
- Do you prefer a simpler application process with less documentation requirements?
- Will this loan help you to establish business credit scores?
- Would you rather find an equipment loan that doesn’t require a personal guarantee?
- Will you be able to afford the monthly payments?
You can ask yourself these and other important questions to help narrow down your equipment financing choices. While there’s no such thing as the perfect lender, you may be able to find a lender that’s perfect for your situation.
The Benefits of Good Credit
Regardless of the financing option you ultimately choose for your business equipment loans, one fact is certain: Having good credit will usually help you secure the best deal available.
With good credit, your odds of qualifying for a loan are much better. When you do qualify for financing, you may also be able to take advantage of equipment loans with lower rates and better repayment terms and even get to skip collateral.
Ready to start building better business credit today? The Business Launcher tool from Nav can offer you helpful, step-by-step guidance to make the process a lot easier to navigate.
This article was originally written on June 12, 2019 and updated on September 1, 2022.