WE ARE OPEN AND LENDING

10 Ways to Finance Equipment for Small Business Owners

10 Ways to Finance Equipment for Small Business Owners (1)

About seventy-nine percent of the businesses in the U.S. use equipment loans or leases to finance their equipment. From helping companies avoid the hidden costs of long-term borrowing to enabling them to reinvest in their operations, financing equipment makes sound economic sense.

Although the U.S. economy is on track for solid growth in 2022 due to a healthy labor market and substantial housing expansion, downside risks are increasing. Fueling this year’s inflation is political unrest and disruptions in the supply chain. The word “stagflation” returns to the economic lexicon due to rising prices and the possibility of growth halting, and it would hinder the Fed’s efforts to accomplish its intended “soft landing.”

Mortgage rates, which are rising in the second half of the year, may also limit expansion in the housing sector. Even though we still expect equipment and software investment to grow moderately, the overall economic view is more gloomy for business funding than at the beginning of the year.

The most common type of financing is leasing. Leasing allows small business owners to pay only for what they use and not worry about paying off an entire loan at once. The expense of the lease can be spread out over time, making it easier for both the business owner and the lender.

The range of equipment available for financing is wide; whether heavy equipment financing for sophisticated construction machinery or the latest software tools, or even basic office supplies, almost every piece of equipment that business owners envision for growth can be financed.

As it stands, a myriad of small business loans exists to do so. And it would help if you had the correct information about each financing option available to you. To help you make a good business decision, we’ve put together this guide elucidating various business equipment financing options and how they work.

U.S. companies are generally doing well financially. The lifting of many limitations imposed during the pandemic has increased demand and improved consumer and business demand.

Business owners need actionable forward-looking information to make well-educated financial decisions to make strategic decisions.

(A good reference is the 2022 Q2 Update Equipment Leasing & Finance U.S. Economic Outlook)

 

Equipment Financing – A Primer 

What is equipment financing?

Equipment Financing Primer

Equipment financing is a small-business loan created exclusively to acquire machinery and equipment needed in your company’s operation.

Equipment financing is typically when a company needs to purchase new equipment to improve productivity, expand capacity, or enhance efficiency.

An example might include purchasing a new forklift truck to replace one that is no longer operational or purchasing a new one.

Equipping Your Business with Equipment

Whether it’s a loan to start a small business or expand your current marketplace, financing the acquisition of machinery and equipment required for the operation of your company is critical.

You can buy or lease any machinery with the help of an equipment loan, including office furniture, commercial ovens, farm equipment, software, and medical equipment, to name but a few. 

Benefits of equipment financing?

If you don’t have high-quality, current equipment, you won’t be able to run a successful operation, much less profit from it. But perhaps you’re apprehensive about the high cost of equipment and the possibility of tapping into your available funds.

There’s no need to put up with old, broken equipment when you have Sunwise Capital, an online lender, on your side. You can acquire financing for the total cost of the equipment, with no down payment and flexible monthly installments, at the lowest interest rates in the industry.

Suppose you’re a contractor, landscaper, restaurant owner, or B2B service provider. In that case, Sunwise Capital makes it easier than ever to keep your business running with either an equipment purchase or lease term.

Cash flow preservation

cash flow for equipment

Small businesses can get the equipment they need without breaking the bank by leasing it instead of buying it.

Many small firms cannot afford to buy everything they need at once due to the high cost of the equipment. It is possible to spread the costs over some time by leasing equipment.

While leasing does not give you ownership of the equipment, you won’t have to worry about it becoming obsolete.

Leasing equipment allows you to pay a certain amount for a set time, and the interest and fees are a part of the monthly bill. Contracts for leasing equipment are usually for a period of three, seven, or ten years.

In contrast to owning, leasing offers advantages such as cheaper monthly payments spread out over months or years rather than provided in a single payment. Service agreements and service add-ons are standard features of commercial equipment leases, providing businesses with additional security and removing the need for in-house personnel.

Consider leasing if you can’t afford new equipment or technology for your organization. Leasing allows you to spread out the purchase cost over a more extended period rather than making a hefty upfront payment.

You can return the equipment after the lease or purchase it for a price that considers appreciation and the total amount you paid for the equipment during the lease period.

More convenience, fast execution

As a rule of thumb, applying for equipment financing should take 5 to 10 minutes. Complete our online application, add your vendor invoice, and you’re done!

Upon receiving your application, a Sunwise Capital specialist will contact you to inform you of their decision or gather more information about your company. Once your application has been approved, your underwriting professional will work with you to determine the best payment method and amount.

Often entirely tax-deductible

A tax break may be available, and equipment leases may be eligible for tax deductions in some instances. To qualify for Section 179 eligible financing deductions, you may be able to deduct the cost of your lease payments. Always check with a tax professional.

Maintaining current knowledge of tax laws is also essential.

A purchase or capital lease could lower your company’s taxable income if the acquisition falls within IRS limits.

According to Thomson Reuters, first-year depreciation deductions for qualified property purchased and put into operation after September 27, 2017, but before January 1, 2023, or for a specific property with extended production periods are available at 100% for businesses that meet the requirements.

Equipment Financing vs. Equipment Leasing: Know the Difference

EQUIPMENT FINANCING VS. EQUIPMENT LEASING

Leasing or borrowing money (as a loan) to pay for equipment is the most prevalent method of acquiring it. Both options give you access to the tools you need to run your business, but they do it vastly differently.

How does equipment financing work?

An Equipment Financing is a loan that you can utilize to buy equipment for your business. Businesses can buy the equipment to keep their operations running and profitable without a dip into their working capital.

Loans for the purchase of equipment are, in fact, business loans. Equipment Financing comprises regular monthly payments that include interest and principal, just like traditional business loans. On the other hand, equipment finance pays the vendor/seller upfront for the entire cost of the equipment.

How does equipment leasing work?

Equipment finance and leasing are viable options for purchasing new equipment for your business, but there are significant differences. Ownership of the equipment is the critical distinction between these two possibilities.

When you employ equipment financing, you buy the equipment from a vendor and become its owner. On the other hand, leasing does not grant you ownership of the equipment. Lease agreements allow you to rent a specific piece of equipment and have the option to buy it after your lease is up.

Which option is right for you?

Taking out an equipment loan, an equipment lease, or another business financing option is significant for business owners. To find out if it’s right for your company, examine your objectives and specific requirements.

Leasing is the best option when you need equipment for the short term, and it will save you money. A loan or conventional line of credit may be more advantageous if you plan to use the equipment for three years or more.

Consider how quickly your firm is expanding and evolving as well. For companies that are growing at a rapid rate, leasing may be more cost-effective than purchasing.

10 Ways to Finance Equipment in 2022

10 ways to finance

Business line of credit

Business credit lines are an option for small businesses that don’t know how much equipment they’ll need. The amount of capital that can be borrowed from a company line of credit is virtually limitless, and it can be used for any purpose (as long as you don’t go over the credit limit). Because the line of credit is unsecured, there is no requirement for the property or equipment as security. A company line of credit is an exciting choice for startups because you don’t need a strong credit score to receive one.

Rather than a set APR, a company line of credit may come with a variable rate. Interest rates may be higher than expected if you need to buy your new equipment within two years. Inflationary pressures have been building, notwithstanding low-interest rates. A company line of credit is more risky than usual at this time because of the high-interest rates that come with rising inflation.

Term Loans

The borrower agrees to repay the lender with a fixed or variable interest rate and a predetermined payback period. Due to the competitive interest rates and repayment terms of up to 10 years (SBA), owners can pay the loans with manageable monthly payments.

Term loans are easy to overlook because of their flexibility. Suppose that you also require finance for additional business investments and purchasing equipment. With a term loan, there are no restrictions on how you can spend the money. Owners can take the money from a term loan and put it to good use, such as hiring seasonal workers or launching a marketing campaign.

If you use an internet lender, you can get accepted and get your money the same day.

However, if you want to secure a loan from a bank, you’ll need a solid credit score and a history of making money. In addition, you may have to meet a minimum loan amount of $25,000. There are other ways to finance a $10,000 piece of equipment, such as a credit card or a loan.

When it comes to small businesses, term loans are hard to beat.

Equipment Loans

Taking out a loan for the sole purpose of purchasing equipment is known as an equipment loan. Lenders may confiscate your equipment as collateral if you default on a loan and do not keep up with payments.

Business owners who cannot afford to buy a piece of equipment outright can benefit from these loans. A lender may allow you to pay over time by extending favorable terms.

This configuration has some drawbacks. Some financing institutions are willing to pay up to 90 percent of the cost but expect you to pick up the remaining 10-20 percent.

Another disadvantage is that you will pay more in the long run than you would have if you had purchased the equipment outright.

Interest rates, loan amounts, and term duration all affect the cost of borrowing. As a result, before accepting an equipment loan, perform the math. Your credit rating, the length of time you’ve been in business, and any other complex formulas a specific lender decides to apply to your case can all affect the interest rate on an equipment loan. In most circumstances, interest rates for equipment loans are set and not variable.

See the Equipment Leasing table below.

SBA Loans

For the “riskier” small firms, the Small Business Administration (SBA) guarantees portions of loans, making it simpler to obtain financial assistance.

However, applicants for SBA loans must make substantial financial commitments to their companies and cannot obtain a loan from another organization.

Pros

You may be able to secure a substantial loan. The 7(a) loans, for example, have a $5 million maximum loan limit.

For small businesses, lending rates are reasonable and fixed or adjusted to the prime rate.

Cons

With a short-term or long-term loan, you can acquire the money you need immediately, but you won’t be able to get that quick funding with an SBA loan. When applying for an SBA loan, expect the process to take months. So, if you have an urgent business need, the SBA approach isn’t for you.

A down payment of 10-20 percent of the purchase price may be necessary. However, you can get up to 100% financing with equipment loans.

Unlike term loans and equipment loans, SBA loans only make sense in certain situations.

As an alternative, if all of your other small business loan choices have failed, this may be the best option for financing a pricey piece of equipment.

Business Credit Card

A business credit card could be a good solution if you require short-term working capital and can find an appropriate credit card.

In addition, business credit cards often have lower credit limits than personal credit cards. Finding a credit card with a $500,000 credit limit will be difficult if you want to buy equipment that costs that much.

Bad Credit Business Loan

It’s simpler than you might expect to get approval for equipment financing. To be eligible for a business loan, you usually need to have been in the company for a year or more, have annual revenue of $100,000 or more and have a credit score of 650 or more. It’s easier to get a loan because the collateral is often part of the loan itself.

A small company can secure a loan even if you have poor credit. Your business’s financial health is more important than your personal credit score. In most cases, lenders want a credit score of at least 500, six months in operation, and $100,000 in yearly income.

Merchant Cash Advance

A business cash advance is technically not a loan. On the other hand, MCA providers buy your future sales at a discount. For short-term cash flow concerns and a wide range of short-term needs, this sort of financing is specifically designed for those situations.

Asset Based Loan

Asset-based lending allows the business owner to use real estate or equipment as collateral. The minimum FICO score is 400, with paybacks ranging from 6 – 12 months to five years. The payments can be either daily or weekly.

Loan amounts range from $20,000 to $3M. The interest rates vary from mid-teens to 20% plus. Equipment you own can receive up to 65% loan to value and real estate up to 75 percent.

Revolving Line of Credit

A revolving line of credit can secure equipment, marketing materials, inventory purchases, and more with the money. You start repaying the line as soon as the revenues start rolling in.

Rather than installment credit, Revolving credit is a company line of credit. Loans are installment credit, which means that you borrow a certain amount and pay back that amount over a specific period, regardless of whether or not you use the money to purchase something.

Revolving credit is comparable to a credit card in that you don’t have to pay until you use the money. If you need to purchase new equipment, a company line of credit provides you with immediate access to funds.

When purchasing custom-made or secondhand equipment, using a company line of credit may be an option when equipment loans or leases are not available.

In the eyes of the seller, your company is paying for the equipment in cash. In addition, if you pay in cash, you have more negotiating power when negotiating the equipment’s price.

Equipment Leasing

Leases are standard for businesses who need to swap out equipment frequently or don’t have enough money to put down on loan. Additional soft expenditures, such as delivery and set-up, are more likely to be covered.

The equipment is rented rather than purchased, so you have to pay the price to use it. Although you are theoretically the equipment owner, the lessor (the leasing firm) allows you to use it.

Depending on your company’s requirements, lease terms can vary. If a business needs to upgrade its equipment regularly, it is most typical for them to enter into a leasing agreement.

Some lessors allow you to purchase the equipment at the end of the term if you want to keep it.

In the long term, leasing may be more expensive than taking out a loan, despite cheaper monthly payments. The higher interest rate on a lease makes it more costly than a loan.

Finance and operating leases are the two most common forms of leases. The former allows you to finance the equipment you intend to buy for the long term, similar to a loan alternative. The latter is more like a rental agreement, and you’ll usually have to return the equipment to the lessor after the lease. There are a plethora of variants for each of these kinds. Some of the most typical varieties you’ll encounter include:

A Fair Market Value (FMV) lease is a long-term rental agreement in which you pay a fixed amount each month to use a specific piece of equipment. You can return the equipment at the end of the term or purchase it at its fair market value.

In a $1 buyout lease, you pay for the equipment’s cost-plus interest throughout the lease’s duration. You will owe exactly $1 at the end of the transaction, and you’ll own the equipment once you pay the residual, which is only a formality. Apart from a few minor variances, this lease is quite similar to a loan in structure and cost.

After the term, you can purchase the equipment for 10 percent less than the original cost. This arrangement is the same as a $1 lease, and these typically have cheaper monthly payments than a lease with a $1 buyout option.

 

TERM EQUIPMENT FINANCING EQUIPMENT LEASING
FICO 675 665
TIME IN BUSINESS 3 yrs. 3 yrs.
REVENUE
TERMS 24 -72 mo. 18 mo. to 6 yrs.
PAYMENTS
AMOUNT AVAILABLE $15k to $5M $150k to $10M
INTEREST RATE as low as 7.50%
TYPE OF INTEREST
TIME FROM APP TO FUND 1 day
PERCENTAGE OWNERSHIP all 15%
TYPICAL PAYMENT ON $100K $4,479 (24 months)

 

FAQs

FAQs

What are the requirements for equipment loans?

There are a variety of reasons why equipment loans are popular among entrepreneurs. For many small businesses, even those with less-than-ideal credit histories or those that haven’t been around for very long, the standards for qualifying for an equipment loan aren’t too high.

In general, the following are the minimal requirements that most lenders require for equipment loans:

  • An annual income of at least $100,000
  • A credit score of 550-600 is required.
  • At least a year in the business

 

On the other hand, SBA loans often only accept applicants with excellent credit, at least five years in business, and a steady cash flow.

How much can I borrow?

Up to $5M on equipment financing and $10M on equipment leasing.

Are there any downsides to equipment financing?

There are cons to financing equipment. A business equipment loan may not be appropriate for all business owners. You’ll likely need a sizable down payment and good credit to be eligible. When compared to paying with cash, financing equipment is more expensive. You’ll end up spending more in the long run if you buy equipment on credit rather than pay some money when it’s on sale.

Equipment purchases can result in out-of-date gear before you’ve even finished paying off your debt.

Financing equipment is sometimes less expensive than other forms of flexible financing. Don’t assume that’s the case! With a low-rate business credit card, you could buy an excellent piece of old equipment at a discount and still come out ahead.

Your business credit reports will also be affected by any UCC filings made by the lessor. You should make sure it is released at the end of the lease.

What if my credit history isn’t good?

When you apply, you’ll find that the qualifications for equipment financing vary by lender. The majority, however, demand a high personal credit rating and a solid track record of earnings. As the business owner, you will need to provide a copy of your most recent bank statement as part of the application process so that they can determine your ability to pay.

What are the limits on equipment financing?

When looking into and applying for small business equipment loans, there are a few things to bear in mind.

Most equipment has a useful life and must be replaced if it is to be kept in service. When deciding how much money to borrow and the conditions of your equipment loan, you should consider the equipment’s functional aspects (such as upkeep costs). Before you apply for a loan, keep the following things in mind.

What is the average lifespan of the item of equipment you’re considering purchasing? What you decide will significantly impact how much money you should borrow and how you structure your repayment plan.

For example, if your equipment has a lifespan of five years, your repayment schedule (loan term) should be no longer than five years.

Running a business requires the proper tools. A business lender can help you identify your small company equipment financing options.

What equipment should I finance?

Industries

  • Medical/Dental Practices
  • Construction
  • Manufacturing
  • Agriculture
  • Transportation
  • Restaurants

Equipment Examples

Spreadsheet Equipment Leasing Examples

What if I have a business credit card?

Paying an annual rate of interest (APR) in the teens is not something you want to do, so if you’re considering using a business credit card to buy new equipment, caveat emptor.

A business credit card could be a good solution if you require short-term working capital and can find an appropriate credit card.

A 15 percent APR may not be the ideal option if you are unsure of your ability to repay the loan in the following few months.

Do not use a personal credit card for your business. If you need a business credit card, look at this option.

In addition, business credit cards often have lower credit limits than personal credit cards. Finding a credit card with a $500,000 credit limit will be difficult if you want to buy equipment that costs that much.

What if I’m not able to make the loan payments?

Your lender has the right to sue you or your company to recoup the loan principal and interest, fines, fees, and other costs.

Speak to the lender before you find yourself in this challenging situation. Most reputable lenders will work with you to find an agreeable workout.

What are the terms of an equipment loan?

The loan amount, interest rate, period, and collateral all play a role in determining your monthly payments for an equipment loan. Depending on the industry and type of equipment, these characteristics can vary greatly.

Here is an example:

  • Loan amount $250,000
  • Credit requirement 600
  • Attractive rates starting as low as 4.99% to 25%
  • Funding in 24-48 hours
  • Prepayment penalties – No (depends on the lender)
  • Flexible payments
  • Can require a personal guarantee, equipment as collateral, or UCC lien.

What are the factors that affect equipment value?

Several factors, including the following, influence equipment pricing:

  1. Demand and supply
  2. Economic and market conditions
  3. Manufacturer design and functions
  4. It’s a matter of age and condition
  5. The reputation of the seller or the previous owners
  6. Ability to perform equipment inspections and testing

What are the 5 critical factors in selecting a lender?

  1. Has the financial wherewithal to lend you what you need
  2. Being flexible with rates and terms
  3. Responds in a timely fashion
  4. A reputation that can’t be beaten – real-world business experience
  5. In other words, a true partner, not just a loan provider.

 

Conclusion

Whether you’re starting a new venture or looking to expand the current one, financing equipment effectively builds a solid foundation for growth. Choosing the best solution for your company and making the most of it are the most critical steps.

 

With the widening pool of options available to businesses of all kinds and sizes, it’s no surprise that financing equipment has become so popular. Check out our list of business loans to learn more about the various financing options available and what they offer.

 

Mark J. Kane is a successful entrepreneur spending the last 16 years lending money to business owners. Beginning his career as a psychologist, at the age of 23 he became the youngest Hospital Admin running a 100+ bed facility. He built two businesses to over 500 employees and a business from scratch to over $18M in revenue in 18 months before selling. This experience led him to begin Sunwise Capital.

Take Your Business Further With A Loan From Sunwise Capital