From general term loans and credit lines to financing for SBA-supported equipment loans and loans, your business has many equipment financing options. Each has its own advantages and disadvantages, including longer loan terms, lower interest rates, or the ability to use modern equipment without ownership.
To select the right loan for your business, see how different types of equipment finance work and which lenders offer them.
Types of equipment funding
Companies often use equipment loans to fund their equipment, but they can purchase equipment with many types of business loans. Equipment financing options include:
Period loan
A term loan allows businesses to take lump sums and repay them for an average of 5-10 years or more. This flexible type of loan is tailored to a variety of needs, including working capital and large one-off costs.
Most equipment loans are protected, while the term loans are secure or protected. Protected loans are supported by business assets. This means that if lenders don’t pay the loan, they will seize their assets, which will reduce risk to lenders. Protected loans may allow you to obtain lower interest rates and more favorable repayment terms.
If you’re looking for a term loan, it works best:
- Payment has been fixed over a period of time
- Larger loan amount
- Unsecured and unsecured loan options
SBA Loan
An SBA loan is a government-supported loan provided through an approved SBA lender. These loans come with competitive interest rates and long repayment terms, making them perfect for business owners looking for manageable payments. They are designed for businesses that are not eligible for traditional funding. However, you need to be patient as an SBA loan can take between 30 and 90 days.
Small Business Management (SBA) offers several types of loans that can be used to purchase equipment.
- 7(a) Loan. These are the most common types of SBA loans and are available from many lenders. This type of loan can be used to purchase general working capital and equipment.
- 504 loan. The 504 Loan is designed to buy larger equipment. Your business can borrow up to $5.5 million, and in the case of working capital loans, repayments last between five and ten years.
- Express Loan. These work in the same way as 7(a) loans, but the loan amount is limited to $500,000. However, the SBA does not need to approve these loans, making approval times much faster.
- Micro Means. For new businesses, especially those owned by women, minorities and other underserved communities, microloans are more accessible than 7(a) and 504 loans. The equipment is limited to just $50,000, but you should be able to qualify for low credit or revenue.
An SBA loan works best if you’re looking for:
- More affordable loan fees
- Funding if you cannot obtain it otherwise
- Various loan options
Equipment Loan
Equipment loans are a standard option for financing equipment, as they are supported by the equipment on which the loan is purchased. They are widely available from banks and other lenders, but you can also find funding options through sellers.
Equipment loans are protected by equipment, which means there is less risk to lenders and offers lower interest rates than unsecured loans. They also tend to offer more accessible eligibility requirements, accepting new businesses and business owners with poor credit.
That said, the interest rates on equipment loans can be high, with some APRs reaching over 30% depending on factors such as creditworthiness and business revenue.
If you’re looking for an equipment loan works best:
- Equipment-specific funding
- Better approval odds
- Built-in collateral options
Equipment Lease
You can choose to lease your equipment as an alternative to your equipment loan. Equipment leases may require less monthly payments and do not require a down payment like an equipment loan. What happens at the end of a lease depends on the type of lease you are signing.
Operation Lease: These allow you to use the equipment for the lease period before returning it in good condition. It provides business access to the equipment you need and is a good option if you are in an industry that requires frequent technology updates.
Capital Lease: This allows businesses to purchase equipment at the end of the lease period. They have low payments like operating wages, but once your lease is finished, you may need to make a big payment at the end of the balloon payment, to cover the residual value.
If you’re looking for equipment leases work best:
- Less risk than equipment loans
- Use of equipment without ownership
- Short-term equipment usage
Credit business line
Credit lines like business credit cards work. Your business has access to credit restrictions on lender sets and can draw and pay back if necessary. This makes it a good option for businesses that frequently need to purchase or repair equipment.
Using a line of credit allows you to pay interest only on the amount you use. Paying off your loan will fill up your credit limit and allow you to borrow again from the credit line. This gives your business sufficient flexibility based on cash flow and other operating expenses.
While business line credit lines typically have more loan amounts and lower starting interest rates than business credit cards, business credit cards have the opportunity to earn GRACE period, 0% introductory APR offers and purchase rewards.
If you’re looking for a business line of credits works best:
- Flexible fundraising
- Fast funding
- Loan amount decreases
What can I use equipment funding for?
Equipment financing loans are most commonly used to purchase commercial equipment that may or may be related to the products or services you sell. This can include:
- Building HVAC
- Office furniture
- computer
- Sales Points System
- Delivery vehicle
- Manufacturing equipment
- Agricultural Equipment
- Walk-in Fridge and Freezer
Please note that the equipment you purchase is used as collateral, so lenders have conditions regarding the type and condition of the equipment they purchased. For example, you may not be able to obtain funding for equipment such as:
- It is outside the manufacturer’s warranty
- Lemon law vehicle
- It does not meet current safety standards and regulations
- Not maintained according to manufacturer’s instructions
- It will be depreciated severely
Conclusion
There are many equipment financing options and alternatives for almost any business. The right choice will depend on how you set up your business and the funds and features you need. Consider each option carefully and plan to successfully manage your equipment loan.
