What is equipment financing?

Equipment financing is one of the more unsung types of small business financing available. With equipment financing, a small business owner works with a lender to finance a piece—or multiple pieces—of business equipment that you need for your company. This could be either new or used equipment—it doesn’t matter. 

There are a few reasons why you’d use equipment financing: first, if approved, you’ll be able to spread out the cost of paying for expensive business equipment across a few years; next, it’ll allow you access to capital to make large gear purchases that you might not be able to otherwise afford.

You can also get an equipment loan using other types of small business financing, such as a term loan. We’ll go through the best equipment financing options for your business needs, what’s required to obtain an equipment loan, and the types of businesses for which this type of financing is well suited.

Advantages/disadvantages

There are many advantages to equipment loans. First, you don’t need to have perfect credit and business financial history to obtain one. That’s generally because the equipment itself serves as collateral for your loan, which enables lenders to provide funds to slightly higher-risk clients. Next, it’s great on your cash flow, since big equipment purchases often take a substantial bite out of your operating cash flow, which can put your business in a crunch. Additionally, these loans have little paperwork (unlike, say, SBA loans), which cuts down on the headache and enables you to move the process along faster. Finally, most equipment loans are also made at fixed rates, so you don’t have to worry about not expecting the payments coming your way.

There are, of course, disadvantages, too. The first is that your loan term will last as long as the equipment itself does. That means it probably isn’t a quick pay off, unless you prepay your loan. Additionally, lenders won’t want to extend a term past when the equipment is expected to be valuable, just in case you default and they need to liquidate your equipment. And, depending on the structure of your equipment lona, some (not all) lenders may also require a UCC blanket lien in additional to the equipment that serves as collateral for the loan. 

An overview of equipment financing

  • Enables you to finance up to 100% of gear or equipment you need for your business
  • Can be applied to new or used equipment
  • Term lasts the expected life of the equipment (generally up to 10 years)
  • Can usually access financing quickly
  • Often “self-secured,” or the equipment serves as the loan’s collateral

Who qualifies for equipment financing?

So many business owners find equipment loans a great option for their business for a lot of reasons (many of which we listed above). But among them is also that the requirements for qualifying for an equipment loan aren’t out of this world—they’re attainable for many small business owners, including ones without perfect credit history, or businesses that haven’t been going for very long.

As you’ll see when you apply, different lenders have different requirements for equipment financing qualification. But most ask for a good personal credit score and a fairly good history of revenue generation. You’ll also show them your bank statements when you apply (more on that in a bit) so they can judge your cash flow.

Minimum qualifications

In general, here are what most lenders ask for as minimum qualifications for equipment loans:

  • $100,000 or more of annual revenue
  • 550-600 minimum credit score
  • At least a year in business

The biggest difference is with SBA loans, which generally only approve candidates with great credit, at least five years in business, and positive cash flow.

How does equipment financing work?

The biggest difference between equipment loans and other types of small business loans is generally the structure. Equipment loans are meant to finance a very specific type of purchase—in this case, the gear you want to buy—whereas some other small business loans are more for working capital, which you can spend flexibly. (Some financing options do come in the form of working capital, too—we’ll get to those.)

With equipment financing, you work with a lender to secure your loan. You’ll generally need to bring a quote to your lender showing them how much the new or used item you want to buy will cost, or documentation of items of comparable value and utility. Generally, loans are granted on equipment that won’t rapidly depreciate and will retain value. Then, of course, when you’re approved, you’ll receive the money from your lender, which you can then use to financing the purchase of your new or used equipment.

Depending on the type of equipment loan you pursue, the process may be as simple as outlined above—you may not need to provide additional collateral, for example. That’s because some types of these loans are called “self-secured” loans, which means that the equipment you’re financing serves as the loan’s collateral. In the case of default, a lender will seize the equipment you’ve purchased and liquidate it to recoup losses. (This is one of the important reasons why lenders often won’t finance equipment that rapidly loses value.)

In other cases, such as term loans, you may need to also put up an additional personal guarantee, or agree to a UCC blanket lien in order to secure your financing.

How long can you finance equipment?

As a general rule of thumb, an equipment loan lasts the life of the equipment you’re financing. That’s generally no shorter than three years, and no longer than 10 (the term often lands somewhere in the middle). The reason for the period lasting the duration that it does is for lender security—they want to make certain that the equipment they’re financing still holds value from a collateral standpoint.

This time period is meant to help take off some of the stress off of your cash flow. Purchasing a large piece of equipment (or many) can really take a bite out of your operating margin, so being able to make incremental or monthly payments as opposed to spending a lump sum is a more favorable choice for some business owners (even with the interest figured in).

What are equipment loans used for?

Equipment loans can be used to replace existing equipment or to buy new equipment as your small business grows. In general, equipment loans are used to make large purchases of equipment that will retain their value, such as large vehicles, such as semi trucks, or even smaller purchases, such as computers and office furniture.

Some examples of common uses for equipment financing include:

  • Heavy equipment
  • Farm vehicles and equipment
  • Construction equipment
  • Restaurant gear
  • Manufacturing equipment

Equipment loans can be used to finance both new and used equipment.

Equipment financing vs. equipment leasing

An important distinction to understand about equipment loans is equipment financing versus equipment leasing. In the former, you own the equipment outright, whereas with the latter, you’re essentially renting the equipment. 

In this sense, it’s sort of like a car purchase versus a car lease—with one, you have the car generally long after you pay for it, although if it becomes very old, it’s still yours. Whereas with an equipment lease, you can generally choose to upgrade to a new model often if it’s important for you to have a new vehicle, even if you don’t have equity.

Whether you want to purchase outright or lease depends on your business situation, but there are certainly pros to purchasing your equipment outright over leasing. First, there’s equity: the equipment is yours after you stop paying for it. That’s great because you don’t have to worry about returning it; you can even use the equipment as collateral for other business financing down the road if you’d like. Another big benefit is a tax deduction: in many cases, you can write off the equipment depreciation for business taxes.

There are some drawbacks to purchasing equipment over leasing, too. First, it can be a little more stressful financially at first, since equipment leases generally have lower monthly loan payments and often don’t require down payments, either. That said, if you want to buy the equipment at the end of the lease, you may end up having to pay a large sum, unlike equipment financing. It is worth noting that this isn’t always the case; depending on your loan, it may end up actually being cheaper over time to buy the piece outright than to pay the monthly rental payments. Additionally, if your equipment gets outdated, you don’t have the ability to easily swap it for newer gear since you own it outright.

Different ways to finance business equipment

We’ve been talking mostly about equipment loans in general, so let’s get to specifics.

Equipment financing

For many, the specific equipment financing route is the way to go. This type of financing is specifically for equipment: you present the lender with a quote for the piece or pieces you’d like to buy; they run through your financial profile to see if you’re approved; and, upon approval, they’ll front you up to 100% of the purchase price so you’re able to buy what you need outright. 

These loans generally do require a down payment (5% to 10%, sometimes up to 20% if the borrower is deemed riskier), and are mostly self-secured, so you don’t need to offer up additional collateral beyond the equipment itself.

This kind of financing often has a quick turnaround time, so you’ll be able to purchase what you need quickly. That’s a huge boon for many, especially if the equipment that needs to be replaced is crucial for business operations.

These loans are often good for businesses that are just building out their facilities, need to expand, or need to quickly replace a piece of essential equipment.

SBA CDC/504 loans

SBA loans, administered by lenders such as banks and secured by the government’s Small Business Administration, can work to purchase equipment. This is particularly the case with CDC/504 loans, which are specifically meant to finance the purchase of fixed assets such as machinery and real estate.

SBA loans are generally the most desirable loans for small business owners, due to their favorable terms, high amounts, and lowest interest rates. For example, CDC/504 loan could give you a period of repayment up to 25 years and loan amount up to $5.5 million. Of course, these great terms come with conditions: only the strongest candidates for SBA loans qualify, and they’re extremely paperwork-intensive loans. That means no fast cash here, and, unfortunately, strong business financials only.

Term loans

Term loans, which you may be more familiar with a “traditional” business loans, are technically flexible working capital, but can be used to finance the purchase of equipment. There are several types of term loans, including short-term and medium-term loans, which will enable you to access capital fairly quickly to make the purchase you need. These are paid over time with fixed payments either weekly or monthly.

Due to the structure of these loans as working capital, you may need to offer up additional collateral rather than the equipment. Sometimes, this includes a personal guarantee and a UCC blanket lien for lender insurance and risk mitigation.

These loans are good for business owners who are a little more established. They are also helpful if the equipment you need is more than about $250,000, which is where some equipment loans cap out, depending on the lender. For business owners with very strong credit, you may end up paying less with a term loan than an equipment loan due to the ability to secure a lower interest rate.

Business line of credit

Another flexible loan option is a business line of credit, which is a typical working capital loan. Here, again, the financing is not specifically tied to the equipment, but you can use the money you get to purchase the gear you need once you’ve approved.

The biggest difference between a term loan and a business line of credit is your payments. Here, you don’t out a lump sum on which you pay interest with fixed payments; instead, you get approved for a certain loan amount, and “draw” against it as you need money. Then, you only pay interest on the amount that you need. Many business lines of credit are also “revolving,” which means you can access the full credit line again once you’ve paid off what you’ve used.

These loans are often available to businesses who don’t have a ton of revenue generated or much time in business. That said, rates can be higher as a result—sometimes, higher than equipment financing. 

Business credit card

For very new businesses, a business credit card can sometimes be the way to go. Granted, you likely won’t be financing an entire factory or farm with a business credit card, but equipment can mean many things—even computers or desks. 

Some business credit cards offer a 0% introductory APR period, during which you can finance the equipment you need interest free until the specified period ends. (Note that after that, interest kicks in—which is often higher than a business line of credit.) Many cards also offer rewards, so you may be able to get cash back or points, which can be especially lucrative if you’re making larger purchases for gear.

How do you apply for an equipment loan?

Depending on the type of equipment loan you apply for, you will need varying documentation. What you must present is also dependent on lender requirements.

Documents you need

Generally, a lender for an equipment loan will ask you to provide:

  • Credit score
  • Equipment quote
  • About 3 months of business financial statements
  • Revenue and time-in-business history
  • Personal identification
  • Business tax return

The exception here is an SBA CDC/504 loan. As we mentioned, these are much more paperwork intensive, and require specific forms, many more personal documents, a business plan, and more.

How much does an equipment loan cost?

Interest rates: Interest rates will vary by the structure of the loan that you choose to finance your equipment.

  • Equipment financing: 8% to 30%
  • SBA 504/CDC loan: 5% to 6%
  • Term loan: 7% to 30%, or 1.15 to 1.5 factor fee
  • Business line of credit: 7% to 35%
  • Business credit card: Average of 18% to 20%

Down payment: Across most loans that require a down payment, you can expect to need to provide 5% to 20%.

Collateral: Self-secured loans may not require any additional collateral. Some other loans may require a personal guarantee or a UCC lien. For SBA loans less than $250,000, no collateral is required.

Repayment period: Across most equipment loans, you can expect repayment terms of three to 10 years. With SBA CDC/504 loans, you may be able to get a term from 10 to 25 years.

Find and compare the best equipment loan options

Banks and alternative lenders

You can go to a traditional bank to find an equipment loan. Banks offer competitive rates, but generally only lend to highly qualified candidates with substantial revenue or time in business. Alternately, many online lenders offer different kinds of equipment financing, or offer services to match you with an equipment lender. Although their rates may be higher than those at banks, you may find that an alternative lender is a better fit for you, since they often offer small business tools and dashboards, and personalized service.

Bluevine

BlueVine offers various types of equipment loans, including business lines of credit and term loans. Although BlueVine does not offer specific equipment financing, you can use the financing provided through BlueVine to secure the equipment you need, and also have access to fast-approval source source of working capital.