Equipment Financing
Equipment financing is the use of a loan or lease to acquire equipment for your business. It allows a business to acquire or upgrade equipment without laying out large sums of money.
Get to Know Equipment Financing
Gerri Detweiler • Updated March 24, 2022
What is Equipment Financing?
You can finance the equipment your business needs by getting a small business loan or an equipment lease. When financing equipment, a business gets a loan to finance the purchase, and owns the equipment financed.
What is the SBA?
With leasing, the business makes payments with the option to purchase that equipment at some point in the future. Either way, the equipment serves as collateral for the loan or lease, and if the business is unable to make payments, the lender or lessor has the right to repossess that collateral.
Equipment Financing Offers
Advertiser Disclosure See all options Advertiser Disclosure See all optionsHow Does Equipment Financing Work?
Equipment financing involves two main steps:
- Find the equipment you need for your business, then
- Explore options for financing that equipment.
Equipment financing may be available through several sources:
- The manufacturer or dealer selling the equipment
- Banks and other financial institutions
- Equipment financing companies, including online lenders
- Marketplaces that match borrowers with financing companies offering loans or leases based on borrower qualifications.
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Get MatchedLease or Buy Equipment: Which is Best?
You have three options when it comes to obtaining equipment:
- Get a loan
- Lease it
- Buy it outright
We’ve already discussed the pros and cons of equipment loans, so let’s review some advantages of the other two options.
When leasing equipment, you typically spend less upfront. It’s easy to upgrade equipment after your lease ends, which comes in handy if your equipment is something like a computer that quickly becomes obsolete. Also, leases may offer tax benefits. If you’re leasing your equipment, you will save money up front, which also helps cash flow, and you can often get access to the latest technology.
One of the drawbacks to leasing is that, over time, you’ll spend more than you would to buy the equipment outright. At the end of your lease, you’ll have to purchase it or find another solution to replace it, or even extend the lease, if that’s an option.
If you buy equipment outright, it is yours. You can sell it if you no longer need it. But buying equipment requires you to spend cash to acquire it. If it becomes outdated, you’ll have to replace it, and you may find it worth much less than you paid for it.
You may be able to turn equipment you own into cash for your business using a sale-and-leaseback. There you essentially sell the equipment to a financing company for cash and lease the equipment back from them. At the end of the term, you can return the equipment or buy it from the lender. Sale leasebacks usually work on a 2:1 ratio. If you want $150,000 in cash, your equipment should be worth $300,000. Why consider this option? You get cash from selling the equipment to your lender, which you can use to operate or grow your business, and you still have access to the equipment. This may be cheaper than financing new equipment.
What Types of Equipment Can Be Financed?
Most tangible assets used in the operation of a business may be financed. A few examples:
- Office furniture and fixtures
- Computers and IT equipment
- Restaurant equipment
- Healthcare equipment
- Dental practice equipment
- Hair or nail salon equipment
- Construction equipment
- Manufacturing or industrial equipment
- Trucks and trailers
- Farm and agricultural equipment
- Snow removal and landscaping equipment
In fact, any business that relies on equipment can probably find some type of financing for that equipment.
What You Need to Know About Equipment
Financing
Pros of Financing Business Equipment
Pros
- Low APRs available to qualified borrowers
- Predictable monthly payments
- Helps build business credit
- Preserves cash for other uses
Small business owners may benefit from lower APRs compared to other small business financing options. You will typically see rates of 8-25%, though lower rates are available to well qualified borrowers.
Most businesses will be able to benefit from depreciation as a tax deductible business expense.
An equipment loan will often be reported to at least one major business credit reporting agency (including the Small Business Financial Exchange). If so, and payments are made on time, you can build business credit, which can help you qualify for other types of financing down the road. And with predictable monthly loan payments, you can budget more effectively.
Cons of Financing Business Equipment
Cons
- Low APRs available to qualified borrowers
- Predictable monthly payments
- Helps build business credit
- Preserves cash for other uses
A business equipment loan isn’t for everyone. You may need a significant down payment and good credit to qualify. Financing business equipment is, of course, more expensive than paying for it with cash. Instead of buying equipment at a discount by paying cash when it’s on sale, you’ll pay more when you add in the cost of financing.
When you buy equipment, you may end up with outdated equipment before you’ve even paid off your loan.
The costs of equipment financing are often lower than other flexible financing options. But don’t assume that’s the case. For example, you may be able to pick up a good piece of used equipment at a bargain price, pay with it using a low-rate business credit card, and come out ahead.
Very interested
Hello, we would like to talk to someone about financing . We started a small business (trash company) and we need to purchase another trash truck as we are getting very busy and need another vehicle.
Please feel free to reach out to Nav’s Credit & Lending team at 844-636-2445.