What Is Equipment Financing?

Equipment financing is a business loan that provides capital for purchasing new or used equipment, such as vehicles, machinery or technology. Equipment loans may fund up to 100% of the value of the equipment you want to purchase. These loans are repaid over time with interest.

Business equipment financing is asset-based financing, which means the equipment itself is collateral for the loan. For this reason, equipment financing is often easier to qualify for than other types of small business loans. Equipment loans can be great options for startups or businesses with average or poor credit scores.

How Does Equipment Financing Work?

Equipment financing is similar to a business term loan. You receive funding for new or used business equipment and make fixed payments over time. You can usually borrow up to 100% of the equipment value, but that varies with equipment type, equipment condition, the lender and your qualifications.

Business equipment financing is a type of asset-based financing—meaning the equipment itself is used to back, or secure, the loan. Generally, this means you won’t have to put up additional collateral and you may be able to avoid signing a personal guarantee.

You may, however, have to provide a down payment of 10% to 25% of the equipment you’re financing. The larger the down payment , the lower the interest rate you’re likely to receive. Overall, equipment financing rates typically range from 4% to 40%, based on the lender, your business’s qualifications, and the equipment you’re purchasing.

Repayment terms on equipment financing are usually five to six years, although some lenders may offer longer terms, up to 10 years. Additionally, some lenders may base your repayment terms on the anticipated life of the equipment—that way, if you default on the loan and they have to seize the equipment and liquidate it, they’ll still be able to recover their losses.

Equipment Financing vs. Equipment Leasing

Lenders may also offer equipment leasing. Although there are some nuanced differences between equipment financing and equipment leasing.

• With an equipment loan you own the equipment at the end of your repayment period.
• With equipment leasing, you have the option to purchase the equipment at the end of the term or enter into a new lease for the equipment you need—similar to leasing a car.

Generally, equipment leasing is more expensive than equipment financing in the long run. Refer to our equipment leasing vs. financing guide to learn more about the differences between these options.

Equipment Financing Example

Now that we have a basic sense of how equipment financing works, let’s walk through an example.

Let’s say you need to purchase a commercial oven for your restaurant—the oven costs $10,000.

You find a lender that’s willing to offer you an equipment loan for the full price of the equipment ($10,000). The lender will charge a 12% interest rate over a three-year term with monthly repayments.

With this setup, you’ll pay back the capital you’ve borrowed during the three-year term with monthly payments of $332.14 (assuming there are no other loan fees). Overall, this means you’ll be paying $11,957.15 for a $10,000 piece of equipment and the actual cost of your equipment loan is $1,957.15.

Although this may seem like a sizable amount to pay based on the value of the equipment, the benefit of business equipment financing (like most debt financing) is that you can pay for this large purchase over three years and don’t have to take the time to save $10,000 to purchase the oven you need right now.

This being said, it’s always important to understand the true cost of your financing before agreeing to an equipment (or any other type) of loan.

Pros and Cons of Equipment Financing

If you want to buy equipment for your business, equipment financing can often offer good rates and terms. However, there are pros and cons to equipment financing.

Pros:

• Quick funding for equipment purchases. Some business loans (such as bank and SBA loans) can take weeks or months to fund, but equipment loans are typically faster. As long as you have the necessary information about the equipment, you can often get equipment financing in a few days.
• Equipment is collateral on the loan. Instead of having to put up real estate or other business property as collateral, the equipment itself secures your loan. Additionally, you may be able to work with your lender to avoid a personal guarantee on the loan.
• Easier to qualify. Equipment loans are a great option for startups or businesses with bad credit. The equipment secures the loan, so lenders are often willing to work with less qualified businesses. Moreover, most equipment lenders report your payment history to credit bureaus—meaning on-time payments will improve your credit history and make it easier for you to qualify for other loans in the future.
• Affordable interest rates. Equipment financing rates typically range from 4% to 40%. Interest rates vary, but generally they are affordable. Rates on the lower end of the range are akin to bank or SBA loans. You may be able to save money by taking the Section 179 business tax deduction.
• Limited paperwork and fast application process: Business equipment financing is available from banks and alternative lenders. Alternative lenders have faster, more streamlined processes. Because lenders aren’t as concerned with your business’s qualifications, you’ll usually see limited documentation requirements, especially in comparison to other types of financing.

Cons:

• Equipment could be obsolete by the time the loan is fully repaid. This is one reason some business owners opt for equipment leasing instead of financing. In addition, you don’t actually own the equipment until you’ve paid off the loan.
• May require a down payment. In some cases, you’ll need to put down 10% to 25% of the value of the equipment. If you don’t have the money for the down payment, it may be more difficult to get equipment financing. Plus, if you can only make the minimum down payment, the interest rate may be higher.
• Only applicable to businesses that need to purchase equipment. Equipment loans fulfill a very specific need. Therefore, if you need funding for another business purpose, you’ll have to explore other options.

Equipment Loans for Startups

Equipment financing is a worthwhile option for many startup businesses, as these loans are easier to qualify for in comparison to other types of business loans. Because the equipment collateralizes the loan, you don’t necessarily need multiple years in business or excellent financials to get equipment financing.

Therefore, if you need to purchase equipment for your startup, you might start by looking into lenders with no minimum time-in-business requirement.

If you qualify, you’re more likely to see higher interest rates in comparison with more established businesses. The stronger your other business loan qualifications are, the more flexibility you’ll have working with lenders to access the most ideal rates and terms.

How Do You Qualify for Equipment Financing?

If you think an equipment loan might be right for your business, here’s how to get the equipment financing you need.

Find the equipment you’d like to purchase. With the application process, many lenders will require an equipment quote, as well as details about the equipment and its condition.

Evaluate your qualifications. To get equipment financing, you’ll typically need a credit score of at least 600, more than $130,000 in annual revenue and two years in business, based on past Fundera customers. However, specific requirements will vary by lender and are generally more flexible compared to other types of loans. Still, the better your qualifications, the more likely you’ll get the most ideal rates and terms.

Complete your application. Typically, you can complete an equipment loan application online very quickly and easily. Equipment financing usually requires minimal documentation and has a streamlined application process, but you can expect to provide some or all of the following:

• Driver’s license
• Voided business check
• Bank statements
• Credit score
• Business tax returns
• Equipment quote

Generally, online lenders process and fund business equipment financing applications in a few days, sometimes faster. If you apply through a bank, you’ll likely see a slower time to fund.

Before you sign an equipment loan agreement and enter the closing process, compare options from multiple lenders to ensure you’re getting the best deal for your business.

Is Financing Equipment a Good Idea?

Although you may be able to use other types of loans to buy equipment, equipment financing often has affordable rates, flexible terms, and fast funding times. Plus it’s much more accessible for startups and businesses with bad credit.

This being said, equipment financing isn’t right for every business—especially highly qualified businesses that can get lower rates on a bank loan or SBA loan. Take the time to explore and compare  your options.

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