How To Get Equipment Financing
Whether it’s a conveyor in your sawmill or a commercial oven in a restaurant, many businesses depend daily on core pieces of equipment. If this equipment breaks down, the resulting idle time can harm sales and customer relationships. The faster it’s fixed or replaced, the faster your business can get back on track.
Alternatively, a new and improved machine, such as a ventless hood in your kitchen or multi-step water dispenser, could save you money or increase operating efficiency. Investing in new equipment that supports increased capacity or a new product line could help you expand your business.
There are many reasons that it could be time for a small business owner to purchase new equipment. Unless you have a large sum of capital saved, and spending it on equipment wouldn’t harm your working capital ratios, taking out a loan to fund these purchases is often your best choice. If you’re ready to apply for an equipment loan now, you can apply online in just a few minutes.
However, if you’re still unclear how much you need to borrow, or the best loan product to meet your needs, read on.
Top Considerations Before Applying for Equipment Financing
Borrowing capital supports your businesses success. When you borrow capital to support growth or a business expansion it can generate increased revenues. Conserving your own capital ensures that you can meet current obligations during a growth phase.
But, in order for borrowing to be successful, small business owners should be clear on its purpose and intended return. Ask yourself several questions before taking out a loan.
Are you already an owner or are you looking to open or acquire a new business?
Where your business is in its current life cycle influences borrowing decisions.
Business owners with several years in business, an established track record in sales, borrowings, and repayments, and a clear business plan will find it easier to borrow. Traditional banks and lenders view you more favorably, as a history of successful operations presents less risk to them. Data from past operations can go into a loan application, and you could have assets such as equipment to pledge as collateral.
If you’re opening a new business, or opened within the last few months, you have different funding needs. You could be building out a machine shop or commercial kitchen, and need more capital. A short business credit history means that traditional lenders are wary of lending, as they have no reference points for loan repayments.
With a shorter business history, a lender could ask you to pledge personal assets – such as investment or retirement accounts – to secure the loan. It’s unlikely you’ll get funding from a traditional bank and could need to work with alternative lenders. Your business’s stage in the business cycle will lead you to the right lenders to approach and how much to borrow.
Why do you need the funds?
Knowing why you need the money – to replace an under counter fridge, or to buy a new band saw – is an important piece to successful borrowing.
The “why” dictates the “how much” when it comes to borrowing. If you don’t borrow enough money, you could end up having to take out another loan to complete the purchase. If you borrow too much, you’re paying interest and other fees you could have avoided.
Lenders also set equipment financing ranges that they lend within. If you need a small $5,000 loan and the equipment financier you normally work with doesn’t approve loans for less than $50,000 it would be a waste of time to apply. Before approaching lenders, make a list of the equipment you think you need and price out options.
What can you afford to borrow?
Before you borrow, analyze how the loan’s payment will impact your budget. Can your business’ cash flows cover daily operating expenses and the monthly loan payment ? If not, either lower how much you plan to borrow or wait to borrow until it’s affordable.
A loan payment consists of a portion of the loan’s capital with interest added to it, spread over the repayment term. Taking out a smaller loan leads to a smaller loan payment because you’re repaying less borrowed capital and the interest due is calculated on a lower amount. Lenders will give you an estimated loan payment when you apply, and you can use this payment to calculate the loan’s impact on cash flows.
Include a repayment plan in your budget, and look at how lower-than-anticipated sales could impact this plan. And try to plan for the unexpected, such as shipment delays or customers who don’t pay on time.
Establish the funding timeframe
How long will that commercial oven or band saw last? If the equipment you’re financing has a useful life of three years, don’t take out a five year loan to purchase it.
Apply a matching principle to any loan intended to purchase equipment. The loan’s term should end before or exactly when the equipment’s useful life is done. You want to avoid a situation where you’re still making payments on equipment you have to replace.
Lenders often have standard repayment terms for their loan products. While banks may only lend in two, three, or five year increments, alternative lenders could offer repayment terms of just a few months. Repaying the loan over a more concentrated timeframe leads to a higher loan repayment but gets you out of debt faster.
What is your business and credit history?
Your personal credit score and business history is an important part of your loan application. Lenders weigh it heavily when evaluating your risk as a borrower. Smaller business owners with a lower credit score could find it difficult to borrow.
Lenders compensate for risk by charging a higher interest rate. Small business owners with poor credit will both find it harder to borrow and will pay a higher cost of capital. Before applying for a loan, pull your credit report so you know where best to apply.
With equipment financing, the equipment you’re buying with the loan serves as its collateral. A lender may approve your loan if you have a lower credit score because they could repossess and resell the equipment if you defaulted. But you still may pay more for the loan if you have a low credit score or less time in business.
Best Business Loans Available for Equipment Financing
While an equipment financing loan is an obvious place to start, it’s not always the best choice for your business if you need money quickly or only need to borrow a small amount.
Equipment Financing Loans
Equipment financing loans fund the purchase of a specific piece of machinery. The funds from an equipment financing loan can only be applied to the equipment purchase, which the lender may want to inspect and have appraised. If you have a credit score less than 700, they’ll require a personal guarantee.
Equipment financing lenders will only extend enough credit to cover the purchase price, and used equipment must be less than 10 years old. You can borrow up to $150,000, up to $250,000 if you have a stronger credit profile. Startups open less than one year can borrow up to $25,000, with two years in business you can borrow up to $35,000.
The equipment serves as the loan’s collateral, so you’ll pay a lower interest rate than an unsecured loan. It can be an easier loan to qualify for, even with a lower credit score, if you’re buying a specific piece of machinery.
Short-Term Business Loans
If you don’t want to wait for an equipment appraisal, or are buying a less expensive piece of equipment, a short term loan might be your best option. You could pay it off quickly, sometimes in just a few months.
Alternative lenders offer short term business loan with terms of just six to twenty-four months, but at higher interest rates than a bank, 9% to 45%. However, banks often won’t lend for shorter periods of time because the costs of a short term loan are the same as long term loan but they make less money on them.
To apply for a short term loan you must have been in business for a minimum of two years and need a credit score of at least 650. Your businesses minimum monthly revenues must exceed $10,000, but you can borrow as little as $15,000, and there are no prepayment penalties. If you want to pay off the loan quickly, a short term loan could be better for your business than an equipment financing loan.
Bad Credit Business Loans
Unfortunately, the ups and downs of the economy over the past few years could have negatively impacted your business and damaged your credit score. If you had to borrow significantly to get through the pandemic, and saw your credit score slip, traditional lenders may no longer be willing to work with you.
Banks are very picky about lending and reject about the same number as loan applications as they approve. While your credit score could qualify you for bank financing, other factors also lead to a loan application’s rejection, too. They often want to see over five years in business, or significant cash reserves.
Alternative lenders offer bad credit business loans to borrowers with blemishes on their credit histories, and you could use the proceeds from those loans to purchase equipment. If your business generates monthly revenues above $8,000 and you have a credit score above 500, you can qualify for financing with an alternative lender for terms of two to eighteen months. Shield Funding gives borrowers loans in amounts ranging from $5,000 to $1 million, at rates of 12% to 45%.
If you know that it’s time to take out an equipment financing loan or another loan to purchase equipment, apply for a loan today! It takes just a few minutes online, and your loan could be funded within a few days.