Equipment Financing Explained
February 1, 2022
It’d be great if everyone could bootstrap their business and pay for every necessary resource with up-front sales from customers.
But what happens when a vital piece of equipment breaks down at a critical point in time, and you don’t have extra cash lying around?
For example, a florist whose delivery van breaks down just before the peak of wedding season. Or a limousine operator whose limo breaks down right before prom season.
As a small business owner, I’m sure you understand the importance of quickly and economically obtaining, replacing, or upgrading the equipment necessary to operate your business.
Whether it’s office furniture, mechanical equipment, or even vehicles – any machinery or equipment essential to running your business can be covered by equipment financing.
Qualifying For Equipment Financing
Specific underwriting requirements will vary from lender to lender and borrower to borrower, of course.
Typically, a lender will consider your personal and business credit scores, the type of equipment being financed, how long you’ve been in business, and financial statements. A lender wants to understand the financial risk they take in lending to your business.
Fortunately, equipment loans have collateral built-in similar to an auto or mortgage loan. If a borrower defaults on a loan, the lender can repossess the equipment in some cases. That helps make their decision to take on the risk of lending a little easier.
Obtaining Equipment Financing
Traditional banks may provide equipment financing with strict underwriting requirements. Some online lenders provide specialized financing for equipment. Online lenders may have more flexible underwriting requirements.
Some borrowers may also finance equipment through a credit card, invoice factoring, merchant
cash advances, or several other nontraditional funding sources.
Rates and terms will vary, but there are options with as low as 5% interest rates and up to 60 month repayment terms.
Benefits of Equipment Financing
Financing equipment can make it affordable to obtain, upgrade, or replace the equipment you need to run your business.
It can also help you build your business credit if your lender reports to the credit bureaus.
Like any loan, you will have to pay interest, which will be more expensive than paying cash. But typically, it’s still a good decision if the opportunity cost of missing out on business is more than the interest you’ll pay.
Should You Use Equipment Financing
You ultimately have to decide if equipment financing is right for you.
An objective opinion from a financing expert can help you see all the potential benefits and
downsides of using an equipment loan in your specific situation.
If the survival of your business depends on using equipment you don’t currently have – and you don’t have the cash to pay for it upfront – an equipment financing loan may be the best option to not only help your business survive but also to help your business grow.