11 Types of Equipment You Can Finance
Explore funding options to support your business growth.
As a small business owner, you’ll likely be faced with financing equipment at some point. Whether you need equipment lending or machinery financing to start a business or grow the business, it's important to understand the options available to you.
You’ll need to know what type of equipment may potentially be financed and the types of loans that are most useful for equipment purchases. In this article, we’ll discuss the various types of loans that are available as well as equipment that you can purchase with them.
What Is Equipment Financing?
Equipment financing involves taking out a loan specifically for purchasing machinery or business equipment. The loan is especially suited for equipment purchases and is usually repaid over a set period.
Some lenders offer exclusive loans specifically for equipment financing. You may also be able to find funding for equipment by obtaining a term loan from the bank or through an SBA loan.
Loans for equipment usually max out at $250,000. If you require more money to purchase machinery for your business, a term loan or SBA loan may be more appropriate. While these loans generally take longer to obtain funding, they often have greater approval limits.
However, term and SBA loans are more difficult to qualify for, especially if the company has not been in business for long or doesn’t have a significant credit history.
In some cases, you may be able to obtain the loan based on your personal credit history, but it’s generally not advised to use your personal credit for business purchases since it may cause issues with taxes or personal liability.
What Types of Equipment Can I Use a Loan For?
Loans for equipment may be used to purchase items of almost any type. Depending on the industry that your company operates in, various machinery or equipment may be required to grow the business.
Common types of equipment that a business loan is used to purchase include:
- Machinery, industrial machinery, or factory equipment
- Heavy equipment
- Office equipment, such as computers or copiers
- Retail items, such as stands, mannequins, and shelving
- Healthcare equipment
- Office furniture
- Landscaping machinery
- Agricultural and farm machinery
- Small equipment
- IT equipment, such as servers or networks
For example, landscapers often require expensive machinery for larger jobs. Equipment used may include excavators, scrapers, bulldozers, and trenchers. Each of these machines can run into tens of thousands of dollars.
While the business may be able to get by renting these items when needed, at some point, it will need to purchase them for better accessibility and to scale the company.
Equipment Financing Options
There are several different types of loans used most often to purchase equipment. They include loans for equipment, commercial term loans, and SBA loans.
Loans for Equipment
An equipment financing loan may be offered by a bank or an equipment retailer. Oftentimes, retailers who sell expensive machinery work with a lender to facilitate a faster purchasing process.
Equipment loans are great for businesses that only need the funding for their machinery. They are usually easier to obtain than a commercial term or SBA loan since the equipment is used as collateral. Thus, if your company hasn’t been in business long, this may be an easier form of financing.
In some cases, equipment lenders may require a down payment. The down payment is usually no more than 10%, but for those with a riskier credit history, 20% may be required. In some cases, a personal guarantee may be required from the business owner. Once the loan is paid off, the business will own the equipment.
Small business equipment loans offer repayment terms between six months and seven years. The interest rate is typically higher than that charged by a commercial term loan or SBA loan.
Industrial machinery financing and industrial equipment financing typically work the same way. However, most lenders do not charge prepayment penalties if the loan is paid off in a shorter period. Before agreeing to an equipment loan, make sure you fully understand the cost of the loan and its terms.
Commercial Term Loan
A commercial term loan can be obtained to use for equipment financing. It may also be used for other purposes, such as buffering the company’s cash flow or for construction purposes.
These types of loans are harder to qualify for than equipment loans. You’ll typically need a credit score of at least 680 and may need to meet certain other requirements, such as annual revenue of a specific amount or more.
A commercial term loan for machinery usually offers a fixed interest rate. The company will receive the amount it is approved for in an initial disbursement. Repayments are made monthly for the term of the loan, which may vary anywhere from five to twenty-five years.
Prepayment penalties may be charged if the loan is paid off early, but that will vary depending on the terms of the loan agreement and the lender. In most cases, the business owner will be required to make a personal guarantee for the loan.
SBA CDC/504 Loans
An SBA CDC/504 loan is highly desirable for companies that are seeking to borrow a significant amount of money at a low-interest rate.
SBA loans offer some of the lowest interest rates for equipment financing, but they are hard to obtain. Typically, the borrower must wait several months before finding out if they are approved for an SBA loan.
Borrowers who are approved for an SBA CDC/504 loan may obtain up to $5.5 million in financing. Repayment terms will vary from ten to twenty-five years. A down payment of up to 10% of the value of the loan may be required.
Only the most qualified of applicants will be able to obtain an SBA CDC/504 loan. You’ll need to show a good set of business financials and meet the necessary credit requirements of the bank.
How to Get a Business Loan for Equipment
If you’re searching for a business loan to obtain equipment, you’ll need to start preparing before working with a lender. It’s best to take a solid inventory of your company’s finances to determine how much is reasonable for you to borrow. You’ll also need to figure out what type of equipment you need for your business to function.
Equipment loans for new businesses, or equipment loans for startup businesses, are generally easier to obtain than commercial term loans. These loans don’t require as much time in business or high credit scores to qualify. You’ll also be able to receive the funding that you need in a shorter period, often within a few days.
Tools financing, machine tool financing, machine financing, farm machinery loans, and heavy equipment loans may be obtained through typical equipment loans.
Commercial term loans and SBA CDC/504 loans are the best options for companies that don’t need the funding right away and have been in business for some time.
Fundid Capital is a great option for those seeking an equipment loan. The company offers small business loans that can be used to purchase equipment or machinery. You don’t need to fill out a long application to be approved, and in most cases, you’ll receive the funding you need within 24 hours.
Understanding Your Options
Understanding the types of funding available for equipment financing is an important step when applying for funding. You’ll also want to consider how much you can afford to borrow, as well as which types of loans you are most likely to qualify for.
Need funding to grow your business? Learn more about Fundid Capital to find out how you can get capital to grow faster.
Fundid is redefining how small businesses understand and access capital.