Equipment Financing: How It Works
and Where to Apply in 2021

Equipment financing allows business owners to fund equipment without paying the full price upfront. This enables business owners to secure necessary equipment — such as industrial machinery, computers and commercial vehicles — while spreading the expense over several years. The equipment you finance secures the loan, which means the financing company can seize the equipment to recoup losses if you default on the loan.

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How equipment financing works

Equipment financing is a commercial loan used to purchase new or used commercial equipment. You’ll repay the loan over a fixed period of time plus interest. This type of funding allows business owners to secure various types of essential equipment, from computers and commercial vehicles to heavy equipment like bulldozers and cement mixers. Since purchasing outright can strain cash flow, equipment financing spreads out the cost over several years via manageable monthly payments.

The lender typically covers at least 80% of the equipment’s price — you pay the remaining amount via a down payment. The average loan term ranges from three to seven years, with rates that can start as low as 3%.

Equipment financing is a secured loan, as the equipment being financed serves as collateral. Once you repay the full loan amount, you can enjoy ownership of the equipment, without any liens.

Where to get equipment financing

The equipment dealer may offer in-house financing you might consider. Otherwise, you can secure an equipment loan from a traditional financial institution or an alternative lender.

Banks. Traditional banks typically carry favorable rates and terms compared to online vendors. Lengthy approval processes, additional paperwork and higher eligibility requirements, however, are drawbacks worth noting.

Online lenders. Online lenders tend to have more lenient requirements and borrowers could receive funding as soon as after one business day if their loan is approved. Be sure to weigh the convenience of online lending against potentially higher interest rates.

SBA. The Small Business Administration (SBA) offers several types of loans for financing equipment — the general-purpose 7(a) loan and the equipment-specific 504 loan, for instance. SBA loans often carry favorable rates, but can also be difficult to qualify for due to additional eligibility requirements. Traditional financial institutions, such as banks and credit unions, typically facilitate SBA loans, though they may also be available through online lenders.

Here are a few business equipment financing companies you could turn to in your search for equipment financing.

Where to find equipment financing
Loan amount Rate Min. personal credit score Time to funding after approval
Currency Up to $500,000 Starting at 3.00% 650 2 business days
CIT Up to $500,000 Starting at 5.49% 620 1 business day
Funding Circle $5,000 to $500,000 11.29% to 30.12% 660 5 business days
Crest Capital $5,000 to $500,000 Starting at 4.49% 650 Varies

 





Equipment financing vs. equipment leasing

Equipment leasing is like paying rent — you make regular payments to use the equipment but you don’t own it. When the lease term ends, you can either return the equipment or renew your agreement. Unlike many equipment loans, equipment leasing typically doesn’t require a down payment.

Depending on the type of equipment, leasing could be more advantageous than financing. Technological products like computers, for example, can go obsolete within a few years. Leasing allows you to use that computer until your lease term ends, then you could lease a more modern computer afterward.

It’s essential to weigh the long-term costs of your equipment. If the equipment is necessary and won’t go obsolete soon, paying a lease indefinitely may be more costly than financing. In addition, the depreciation on the equipment may not be tax-deductible if you’re leasing.

Equipment financing vs. equipment leasing
Equipment financing Equipment leasing
Payment terms Make regular payments to rent the equipment over a specified period of time Borrower is advanced full amount and repays it in regular payments (plus interest) over a specified period of time
Ownership You maintain ownership over the equipment during and after the loan repayment period. The leasing company owns the equipment and you pay to rent it.
Down payment Typically required Typically not required
Cost Lifetime cost is generally lower Lifetime cost is generally higher
Depreciation Tax-deductible Typically not tax-deductible

 

Capital lease vs. operating lease

While most leases are equivalent to a rental arrangement, some leases allow the lessee to purchase the equipment when the lease term ends. If you think you might want to own the equipment after leasing, be sure to note which type of lease you agree to.

A capital lease allows you to purchase the equipment when the lease term expires, but it typically locks you into the lease so that you can’t cancel it.

An operating lease is similar to a conventional rental agreement: You make regular payments but aren’t paying toward ownership of the equipment. As the lessee, you can usually cancel the lease with prior notice.

Loan vs. lease: Which is right for my business?

Leasing is typically more expensive in the long term than financing. If you plan to use the equipment long term, it may be more cost-effective to finance the equipment and own it after the loan is repaid.

Since lenders may not cover the equipment’s full cost, the borrower may need to make a down payment to cover the difference. Depending on the equipment price, the down payment could be significant. Equipment leases, on the other hand, typically offer 100% financing with no down payment required.

With technology rapidly evolving, the equipment you use today may be obsolete in 10 years. At that time, you may need to invest in newer equipment. However, reselling an outdated piece of equipment you financed could be challenging.

After you finish repaying the loan, the equipment is yours. Depending on the equipment’s value, you could resell it to recoup your investment and use it to purchase a newer piece of equipment.

How to qualify for equipment financing

When applying for business equipment financing, lenders will typically assess your personal credit score, time in business and annual revenue.

Personal credit score. The lender will review your personal credit score to assess your risk level. Most banks will generally require a 680 minimum credit score to qualify for financing. However, online lenders, such as Currency and CIT, may lend to applicants with credit scores in the low- to mid- 600s.

Time in business. Most lenders feel more comfortable lending to an enterprise that has been in business for several months — although many banks may require two to three years in business. If you’re a startup, you may find more success working with an online lender whose requirements aren’t as strict.

Annual revenue. Lenders prefer working with businesses that have a track record of bringing in revenue.

Generally, traditional banks enforce stricter requirements but often carry more attractive rates. If you don’t meet the high qualifications of traditional banks, you may find more success working with an online lender.

Required documents

When applying for equipment financing, the lender may require the following documents:

  • Equipment quote from vendor
  • Driver’s license
  • Personal credit score
  • Recent utility bills
  • Personal and business tax returns
  • Business plan

Get Quotes on Equipment Financing

Equipment financing: Pros and cons

Pros
  • Fast funding. Whereas a bank may take multiple weeks, a borrower approved by an online lender may receive funding after one business day.
  • Interest rate. Equipment loans may carry lower interest rates, since the loan is secured by the equipment you’re financing — although, if you default on the loan, the lender can seize your equipment to recoup their loss.
  • Manageable monthly payments. Spreading the cost of an expensive piece of equipment over several years can help you secure the necessary equipment now without putting a big dent in your business’s cash flow.
Cons
  • Large down payments. Depending on the equipment, a 10% to 20% down payment may cause financial strain.
  • High credit score requirements. Lenders typically want to work with borrowers who have healthy credit scores — otherwise, low-credit applicants may need to offer additional sources of collateral.
  • Loan term extends the equipment lifetime. If you’re financing equipment with a short shelf life — tech products, for example — you may be making loan payments on outdated equipment.

Equipment financing FAQs

Equipment financing is available from traditional banks and online vendors. Online lenders are typically easier to qualify for, due to less stringent requirements. Keep in mind that equipment loans may require specific documentation, such as an equipment quote from the vendor.

Yes, financing used equipment can be more cost-effective than purchasing new. However, lenders may be wary about used equipment financing due to the higher risk — the equipment could break or be difficult to resell if repossessed. If you’re purchasing used equipment, aim for equipment that’s 10 years old or newer.

The key difference between an equipment lease and a loan is ownership. An equipment lease allows you to pay to use the equipment for a specific period of time, but you won’t own it once the lease term ends. However, after repaying an equipment loan in full, you’ll own the equipment.

Equipment financing rates can vary, depending on the lender and your qualifications. Some equipment loans can start as low as 3%, but others may exceed 30%.

Yes, it is possible to secure equipment financing with bad credit. However, if your credit score is especially low, the lender may enforce a blanket lien, which allows them to seize assets beyond the equipment being financed. Be sure to understand all the terms and conditions before signing your equipment loan agreement.