By Jill A. Chafin | Edited by Kurt Adams and Janet SchaafEquipment financing, also called equipment loans, helps small business owners acquire, upgrade or replace essential or heavy equipment, such as restaurant refrigerators, computers, vehicles and commercial copy machines.
Equipment financing is a business term loan that enables companies to purchase equipment needed to operate their businesses — such as computers, vehicles or large machinery. An equipment loan is a type of asset-based financing, meaning the equipment acts as collateral to secure the loan.
Equipment loans typically come with a fixed term — generally around five years, though specific lenders may vary. You’ll need to make regular payments on an equipment loan, usually in monthly installments of the loan principal plus interest, which can be as high as 28% in some cases. Some lenders require a down payment, which can help reduce the overall amount you owe and possibly even the loan’s lifetime.
You have several options when looking to finance equipment for your business.
To qualify for equipment financing, lenders will typically look at the following:
When applying for equipment financing, the lender may require the following:
Business owners can finance all sorts of equipment, such as vehicles, computers, kitchen appliances and commercial office supplies. Most industries can apply for equipment loans. Restaurant owners can also consider a specific restaurant loan to purchase business-related expenses.
Yes, some equipment lenders only require six months in business to qualify for equipment financing — and some don’t have any time-in-business requirements. This allows startups to finance any necessary equipment within their first year of business.
Equipment loans may be available for businesses with bad credit. Some lenders accept minimum credit scores as low as 550 — however, having a higher credit score will likely help you secure a lower interest rate. No-credit-check equipment loans don’t exist, but because the equipment acts as the collateral to secure the loan, borrowers with poor credit may find equipment financing to be an accessible funding option.
The interest rate on equipment loans depends on a few factors, though the borrower’s credit score will likely influence their loan’s interest rate. (Note, however, that every lender differs and will weigh these factors in their way.) Interest rates for equipment loans typically range anywhere from 3.49% to 28%.
Yes, some lenders provide equipment financing options for pre-owned equipment. Shop around with different lenders to compare options so you can make the best decision for your business.
It all depends on your situation. The following factors will likely come into play when applying for equipment financing:
Because the equipment acts as collateral to secure the loan, it’s generally easier to qualify for an equipment loan versus a traditional business loan, as the latter may have stricter lending requirements.
The loan itself is not an asset, but equipment loans are an asset-based form of financing. This means that you’re using a loan to purchase an asset — the equipment itself will serve as collateral for the loan, and once your loan is fully paid you’ll own the equipment free and clear.
Some equipment loans have generous term lengths of up to ten years. Others may be as short as six months. Just keep in mind that a longer loan term will mean paying more interest over the life of the loan.