Business financing comes in a variety of forms, including business loans and lines of credit. If your business uses any kind of equipment, including everything from tablets and laptops to heavy machinery, you may be able to get the money you need to purchase or upgrade that equipment from a business equipment loan.
Addition Financial’s business members rely on us to provide business financing when they need it, and that includes business equipment loans. Since we understand that the process of applying for a business equipment loan can be stressful, here’s everything you need to know about equipment loans and how they work, including our list of the 7 most common mistakes and how to avoid them.
A business equipment loan is a business financing option where the funds from the loan must be used to purchase, replace or upgrade business equipment to fill your business needs. Unlike a traditional business loan or business line of credit, the funds must be used to pay for equipment.
The structure of a business equipment loan is like that of a traditional loan. You’ll make regular monthly payments that include interest and principal until the loan is paid off.
We’ll get into greater detail about the application process, but here again, there are many similarities with other types of lending. You’ll need to provide documentation, complete an application and so on. The loan term for an equipment loan may range from three to seven years; at Addition Financial, we offer terms up to 84 months.
As we stated above, the word equipment is broadly interpreted and may apply to any of these things:
The eligibility requirements for a business equipment loan vary from lender to lender, as you might expect. There are online equipment financing companies that have minimal requirements, and the trade-off for getting a loan from one of them is that you’ll end up paying a significantly higher interest rate than you would if you went to a traditional lender.
Addition Financial offers business equipment loans at affordable rates. Here are our requirements:
To qualify, businesses must have been in operation for at least one year. The equipment being purchased serves as collateral for the loan.
That might seem like a lot, but most businesses already have these documents on hand. We ask for these items to evaluate your company’s ability to repay an equipment loan. They will be used in the underwriting process to evaluate your application.
You should keep in mind that any business lender will review your personal credit score and business credit history, as well.
Business equipment lenders may be traditional lenders, including credit unions and banks. They may also be specialized lenders who provide business funding in the form of working capital loans and business equipment financing.
Choosing a lender should be a deliberate process where you learn about each lender’s financing options and reputation. Here are some of the most important criteria to consider during the selection process:
Remember that when you apply for a loan, all hard credit inquiries within the same 30-day period count as a single query. Take advantage of that rule to obtain multiple quotes and compare them.
Before you apply for a business equipment loan, here are seven of the most common mistakes small business owners make when applying and some guidance on how to avoid them.
Business owners may spend a lot of time thinking about cash flow, but when it comes to equipment lending they don’t always take time to calculate how monthly loan payments will impact their working capital.
Instead of getting caught up in the assumption that the equipment will pay for itself, take the time to revamp your budget to include the estimated loan payment for the amount you want to borrow before you sign your loan agreement.
Short small business loan terms can be tempting because you’ll pay less interest and get the loan paid off quickly. However, a shorter term also means a higher monthly payment and it’s a mistake not to consider what that will do to your monthly cash flow.
Here again, we recommend crunching the numbers and making sure that the loan repayment terms fit into your budget. There’s nothing wrong with going for a longer term if it provides you with some breathing room.
We’ve already talked about lender evaluation but we’re including this item because it is still a common mistake. Every lender is going to present themselves in the best light possible, but you need to find out what other people are saying about them before you choose the right lender for your needs.
We suggest reading online reviews on Google and checking out the lender’s Better Business Bureau rating. Reading testimonials may also be helpful, but keep in mind that no business is going to post a negative testimonial on their website.
Business equipment loans are one way to get the funds you need to buy equipment, but they’re not the only way. Small business owners should consider every option before taking out an equipment loan.
Some other options to consider include equipment leasing and renting or even buying equipment with a credit card. The latter option isn’t the best choice if you can qualify for a traditional business loan, but may be significantly less expensive than the rates from an online lender.
The Internal Revenue Service allows businesses to claim a depreciation deduction when they file their taxes, but a lot of business owners don’t do it. As a result, they miss an opportunity to offset some of the expense of repaying their equipment loans.
For the purposes of depreciation, the IRS considers a business as the owner of depreciable property even if they have debt associated with the property. You can read the full rules of depreciation here. Keep in mind that you may not claim depreciation if you lease or rent equipment, only if you purchase it.
When you buy business equipment with an equipment loan, you are the owner of that equipment. Some business owners make the mistake of not insuring their equipment, but it’s important to do so.
Business equipment insurance covers equipment failure from things like power surges, electrical shorts, mechanical breakdowns and user error. Keep in mind that it covers equipment only, not software. We suggest adding business equipment failure coverage to your Business Owner’s Policy or buying separate coverage to protect yourself.
Before you apply for a business equipment loan, you should review your personal and business finances and have a realistic expectation of what you can qualify for. A lot of small business owners go into the application process thinking they can get approved for a large loan only to learn that they don’t meet the qualifications.
We suggest pulling your personal and business credit reports and reviewing them before you apply. You should also review your cash flow statement and other business documents. Be realistic about how high a payment you can handle and proceed accordingly.
Applying for a business equipment loan can help you get the funds you need to replace, upgrade or purchase equipment for your business. Avoiding the seven common mistakes we’ve explained here will increase your chances of approval and allow you to pursue your most important business goals.
Do you need equipment financing for your business? Addition Financial is here to help you! Click here to learn about our equipment loans and begin the application process today.