What is an Equipment Startup Loan?
An equipment startup loan is a loan used to finance equipment for your new business. Financing the equipment costs for your new business has some important advantages. For starters, when it comes to all the costs of running a business, the cost of equipment is predictable and more or less exact, while other costs fluctuate and appear over time. So using a loan to finance the cost of the equipment lets you keep the rest of your revenue reserved for less predictable costs. Secondly, equipment loans are secured by the equipment itself, which acts as collateral throughout the life of the loan. This lowers risk for lenders, meaning they won’t need to look into your credit history as rigorously as with most other business loans. This means lower rates and longer payment terms, as well as less documentation and quicker processing. Strictly speaking, any kind of loan could be used to finance your startup equipment. However, since new businesses are high-risk endeavors, many loans would be difficult to acquire or would have severe fees and requirements to help guarantee that the lender does not lose money. Some loans that are better suited for financing startup equipment are SBA 504 loans or SBA microloans. SBA 504 loans are usually used to buy real estate for your business, but they can also be used for fixed assets generally, like equipment. As for microloans, since these are for smaller amounts (up to $50,000), which makes them easy to obtain and a good option for new businesses. SBA loans are also good options generally for startups since backing by the SBA provides extra security for lenders.
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Interest rates on equipment loans tend to be low since they’re secured by the equipment. Exactly how low your rates are will depend on what kind of loan you take out. SBA 504 loans, for example, have maximum rates between 4.5% – 8.5%, while microloan rates are typically between 8% – 13%. Rates will also be affected by how much the lender estimates they’re at risk. To assess risk, lenders will consider look into your personal and business (if you have any) credit history.
Since new businesses involve risk, lenders will want to see strong credit ratings before giving out a loan, even if it’s a loan secured by collateral. To get an equipment startup loan, it’s recommended that you have a credit score of at least 680. The most important thing for keeping a healthy credit score is to pay off your debts since even a single outstanding bill can lower your score significantly.
How to Get an Equipment Startup Loan
The most important thing to make sure you’re qualified for an equipment startup loan is your credit. Having a clean credit history, as well as sufficient revenue, puts you in a good place to start considering the application. Clearing or building your credit history can be done simply by incurring debts and paying them off on time. The longer you do this, the more promising will be your credit history. Beyond this, it’s also important to show lenders that you have a strong, well-thought-out business plan. As we all know, new businesses are infamously hard to establish, and lenders will want to believe that your business stands a good chance at succeeding.