Equipment financing is a type of loan designed specifically to purchase machinery and equipment used to run your business. Your business can't move forward if you don't have the right equipment, and major equipment purchases can leave a company struggling to pay bills. Equipment financing is the easiest way to purchase business equipment.
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Updated January 28, 2022
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What is Equipment Financing?
Equipment financing is a type of funding or small business loan to acquire machinery or equipment for your small business. Equipment loans that can cover a broad range of financing needs in virtually any industry. Equipment financing can be used for office furniture, kitchen equipment, farm machinery, medical equipment, computers; or really any piece of equipment.
There are two types of financing for business equipment that are most popular. The type of business financing you choose to acquire your equipment will depend on your business needs such as cash flow considerations, amount of time you require to pay off the financing, monthly payments you can afford, types of equipment, and your credit history.
Types of Equipment Financing for Small Businesses
Small business owners may choose the “purchase” finance option which works like a conventional loan. Financing companies and other lenders agree to lend you money to make an outright purchase of the equipment and you own the equipment.
Purchases usually require an upfront, down payment from the borrower and make monthly payments until the loan is satisfied. The lender may run a personal credit report and ask for a personal guarantee of repayment from the business owner.
Benefits of Outright Equipment Purchase
Tax Advantages – In many cases, equipment purchases can be a full tax deduction in the year it was purchased pursuant to IRS Section 179. This financing option allows many business owners to take 100% depreciation of the asset in the year it was purchased.
Cons of Outright Equipment Purchase
Higher Monthly Costs – Purchasing equipment (like purchasing a car) may often result in higher monthly payments versus leasing. With a typical loan you will likely have to make a down payment and your interest rate will be determined by your personal credit (credit score) or business credit rating. If you have bad credit you will pay a higher interest rate.
Higher monthly costs mean that you will have less working capital available for things like inventory purchases. In general, startups that have lower annual revenue may wish to consider leasing versus an outright purchase to conserve working capital.
In addition, the current issues affecting supply chain as a result of the pandemic and the disruptions presently in the U.S. economy suggest that small business owners preserve as much working capital as possible.
Leasing equipment may be a more cost-effective financing option for business owners. This is especially true for heavy machinery. With leasing, you typically pay for the use of the equipment, you do not technically own it, and therefore leasing generally will result in lower monthly payments.
Benefits of Equipment Leasing
Lower Monthly Payments – Since you will be paying just for the use of the equipment for the lease term, you will typically have a lower monthly cost.
Ability to Trade-up to Newer Equipment – For machinery that may become obsolete over time or wear out, leasing allows the business owner flexibility to easily trade up to newer, more modern equipment at the end of the lease.
Little or no out-of-pocket upfront cost – Typically, leasing does not require an upfront, down payment.
Option to Purchase – In many cases, you will be given a buy-out option at the end of the lease term. Be sure to discuss this with your service provider before you sign your lease.
Cons of Equipment Leasing
Fewer Tax Benefits – Compared to purchasing, equipment leasing has fewer (immediate) tax benefits.
No ownership or equity – When leasing, you will not be building equity in the equipment. However, many leases do offer buy-outs at the end of the lease term. Your servicer will provide you with these details in your lease contract.
How to Qualify for Equipment Financing?
Equipment loans are generally easier to qualify for than a term loan or other conventional financing. That’s because the financing is often secured by the piece of equipment that is being financed. The lenders will almost always place liens on the equipment, but may also ask for other collateral.
Most equipment manufacturers will work with finance companies that help to finance their products. In some cases, the manufacturer will provide the financing directly.
It’s not uncommon for an equipment manufacturer to provide very low-cost or interest-free financing for their products, especially older versions that may be lingering in their inventory.
You may want to inquire about manufacturer finance or used equipment that has been returned from an expired lease. This could save you thousands of dollars.
Alternatives to Equipment Financing
Equipment financing is one of the best ways to finance machinery or larger equipment purchases. However, business owners may look to other forms of financing.
Business Line of Credit
Using existing lines of credit is immediate and can allow your company to make quick purchases.
The U.S. Small Business Administration offers programs that business owners can use to acquire business equipment. The most popular program is the SBA 7(a) loan.
Get Equipment Financing for your Business
Equipment Financing Business Resources
The iCapital Business Loan Insider blog is full of timely articles that will help you understand some of the challenges faced by many small business owners like yourself. From new products for small business loans to emerging trends and regulations, iCapital is engaged in the business of small business loans ownership at many levels. If you have a story idea you would like to share or want us to cover a specific topic such as small business funding, small business operations, or marketing, let us know and we will try to add it to an upcoming article or social media post.
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