What is Equipment Financing?
Equipment financing is the name given to the financing that’s available for funding the purchase of equipment for your business. Equipment financing is available for both new businesses and longstanding businesses in need of equipment upgrades; and they’re a great way to spread out the costs of equipment, which can be a daunting expense for many business owners.
Equipment loans typically require down payments between 10% – 20%, and are secured, since the equipment itself acts as collateral until the loan is paid off. They are offered by both traditional banks and online lending companies, who specialize in quick processing. The SBA is another good option if you need an amount of over $100k since they offer low-interest rates.
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Typical interest rates on equipment loans land between 6% – 9%, although the exact rate will depend on you and your business’s financials. If you’ve got a low credit score, or your business is just starting out, you’ll probably see higher rates than if you’re credit is strong and your business has been running for 3 years or more.
The average lender will want to see a credit rating of 660 or higher before approving you for an equipment loan, even with a down payment of 10% – 20%. With bad credit, you may still have options, but you’ll be asked to provide a larger down payment, and your loan will probably have higher interest rates.
Secured vs Unsecured
Since collateral on a loan guarantees compensation in case you can’t pay on time, secured loans tend to have lower rates and are easier to get. On the other hand, with unsecured loans, you don’t risk losing whatever it is you’ve put up as collateral. In the case of equipment loans, the equipment itself acts as collateral until you’ve paid off your loan, just like with a mortgage or auto loan. Losing equipment would be damaging to both your business and your credit, so you’ll want to have a good repayment plan in place before taking out an equipment loan.
How to Get Equipment Financing
With your credit score and business plan in order, the next steps to getting your equipment loan are putting your documents together and then finding a lender. Here’s an outline on how to get going:
Step 1 – Gather Your Documents
You’ll need the usual statements describing your financial status, such as:
- Profit and Loss Statements (P&L);
- Past Tax Returns (up to 3 years);
- Copies of Title to any Property;
- Bank Account Statements (showing current cash reserves); and
- Any other necessary financial material.
Step 2 – Apply to Lenders
With all your documents in order, it’s time to find a lender. You can apply for a loan from a traditional bank, the SBA, or an online lender. Some online companies advertise same-day funding, while banks can take up to a month, and SBA loans can take 2 or 3 months.
Generally, lenders prefer that you’ve been in business for at least 3 years. Some lenders are startup-friendly, but they’ll need to see that you’ve got an excellent credit rating, and will probably want a larger down payment as well.
The most important thing to show your lender is that you’ve got a strong, well thought-out business plan. You’ll need to show that you have a good understanding of where your business stands within its market, and how the equipment you’re requesting is necessary for competing in that market. You’ll also want to include a personal resume.
Keep in mind that believing in your business is only the first step — when seeking financing, the name of the game is to convince others to believe in it as well. As long as your finances and documents are in order, and you’ve got a clear, convincing business plan, you should have no trouble financing the equipment you need to keep your business on the path to success.