If you own a business, you know how expensive it can be to purchase equipment, whether you’re buying laptops for your staff or a huge piece of machinery that’s crucial to your manufacturing process. Very few companies have the capital on hand to make a major equipment purchase without some sort of financing.
At Addition Financial, we talk to business owners every day about how they can obtain the funding they need to grow. One of the most common topics of discussion is how to get a small business equipment loan. In this post, we’ll explain how small business equipment loans and lines of credit work and give you four steps to secure the equipment financing you need.
What is Small Business Equipment Financing?
Small business equipment financing is a specialized type of financing that provides funds for businesses to purchase necessary equipment. Equipment financing may take the form of a loan or a line of credit and each has its benefits.
A typical small business loan may not have any strings attached, but equipment financing provides money that must be used to purchase or lease equipment. In many cases, collateral and a down payment are required and the lender may have the right to seize the equipment purchased if the business defaults on the loan payments.
How Do Equipment Loans Work?
Equipment loans provide an up-front, lump sum payment that a business can use to purchase equipment to use in the course of business. An equipment loan may be used to purchase everything from office equipment to manufacturing machinery, including scanners, copy machines, laptops, forklifts, and cranes.
Like any business loan, equipment loans have an application and underwriting process that must be completed before the loan can be approved. If your business is approved for a loan, you will make regular monthly payments that include interest. The loan term may be anywhere from three to 10 years, although some SBA equipment loans may have terms as long as 25 years.
How Does an Equipment Line of Credit Work?
An equipment line of credit has a lot in common with a loan in that the LOC is provided to allow businesses to purchase necessary equipment. The primary difference is in the timing of disbursal of funds and in how charges are accumulated.
With an equipment LOC, you get access to funds up to a specified limit and you may withdraw those funds at any time during the draw period. Because LOCs are a form of revolving credit, you may withdraw funds, repay them and borrow them again.
When the draw period has ended, you will be required to make regular monthly payments until the balance is paid in full. With a line of credit, you pay only for what you borrow.
What Types of Equipment Can a Small Business Owner Finance?
There are many types of equipment that can be financed with either an equipment loan or an equipment line of credit. They break down into four categories, as follows.
#1 Office Equipment & Technology Upgrades
Any equipment you use in your office or to run your business can be financed with an equipment loan or line of credit, including the following items:
- Computers and laptops
- Software
- Servers
- Printers
- Scanners
- Copy machines
- Security systems
- Telecommunication systems
People are sometimes surprised that things like laptops and software can be purchased with the funds from an equipment loan.
#2 Heavy Equipment
Heavy equipment is what most people think of when they think about equipment financing. Here are some examples of heavy equipment that can be financed:
- Bulldozers
- Cranes
- Dump trucks
- Excavators
- Refrigerated trucks
- Tractors
Vehicles that are used for regular transportation are not eligible for equipment financing but could be purchased with a commercial vehicle loan. There may be exceptions for other types of equipment used to transport materials or products.
#3 Manufacturing and Storage Equipment
Another category of equipment that qualifies for small business equipment financing is manufacturing and storage equipment. Here are some examples:
- Box makers and sealers
- CNC machines
- Food packaging assemblies
- Grinders
- Industrial coolers
- Lathes
- Machine presses
Any equipment that’s vital to the manufacture or storage of your products may be eligible for equipment financing.
#4 Other Equipment
Here are a few other types of equipment that may be financed but don’t fit into the three categories above:
- Agriculture equipment
- Energy solutions
- Automation machines
- Transportation or freight vehicles
If you’re not sure whether a piece of equipment you need can be financed, your best bet is to contact your credit union or bank to ask.
4 Steps to Get a Small Business Equipment Loan or Line of Credit
Here are four steps to follow to help you apply for and get approved for a small business equipment loan or line of credit.
Step #1: Check Your Credit (and Repair if Necessary)
Your business credit score plays a significant role in your ability to obtain equipment financing. Potential lenders will likely check both your business credit score and your personal credit score to determine whether they will lend to you.
You can improve your credit score by getting caught up on late payments and paying down your debt. Even if you have decent credit scores, you may want to do some work to improve your scores. Businesses with excellent credit will almost always get a more favorable interest rate than businesses with middling credit.
Step #2: Have a Detailed Business Plan
Most commercial lenders will want to see your business plan before they approve you for an equipment loan. Your business plan should do the following things:
- Provide details of your existing cash flow
- Outline your growth goals
- Identify your target market
- Explain how your product or service will meet the needs of your target market
- Provide an executive summary of your business and goals
Your business plan doesn’t need to be very long but it does need to provide your lender with the details and information they need to feel comfortable that your business is viable.
Step #3: Prepare Your Financial Documents
Your lender will need additional details about your business, specifically about your revenue, cash flow, and projected earnings. Lenders request these items because they need to be confident that your business brings in enough revenue for you to repay your loan amount.
At minimum, you will need to provide the following documents with your application:
- Your balance sheet
- Your profit and loss statement
- Your cash flow statement
- Your business and personal tax returns
If your company hasn’t been in business long, you should anticipate greater scrutiny of your personal finances. You should also be prepared to offer a substantial down payment and collateral to secure your loan.
Step #4: Respond to Questions in a Timely Manner
Like any other loan, small business equipment financing has an underwriting process. In the course of underwriting, your lender may come back to you with questions about the documentation you have submitted or with requests for clarification or additional documentation not provided with your application.
You’ll have the smoothest possible underwriting experience if you respond to questions quickly and provide information as soon as it is requested. Delays may hold up the underwriting process or even cause your loan or LOC to be denied.
What Are the Pros and Cons of Small Business Equipment Financing?
Like any loan, small business equipment financing has its pros and cons and you should consider them before you apply.
Pros
- Equipment loans make it easy to get the equipment you need quickly.
- Equipment loans can help you improve your business credit score if you make your payments on time.
- Equipment loans and LOCs can be affordable, particularly if you get a secured loan.
Cons
- Payments may negatively impact your cash flow until the loan or LOC is paid off.
- Loans are more expensive than saving up to buy the equipment you need.
- Your credit may take a hit if you are unable to make payments on time.
For many small business owners, the pros of equipment loans and lines of credit outweigh the cons because they can’t afford to wait long enough to save up for equipment leasing or to buy the equipment they need outright.
Small business equipment financing is widely available and can help you purchase the equipment you need to make your business into a success, whether you need software updates, manufacturing equipment, or heavy equipment to use in construction.
Are you in need of equipment finance to purchase business equipment? Addition Financial is here to help! Click here to read about our equipment loans and begin the application process now.
Posted on Oct 11, 2022
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