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Equipment Financing for Small Business
Written By: Adam F.

If you need funding to purchase equipment for your business, there are plenty of options to examine.

One of the best, however, is equipment financing.

This type of financing is specifically designed to help you get the equipment you need to grow your business, with favorable terms and rates.

In this guide, we’ll explore how equipment financing works and some of the advantages that come with this kind of financing.

How Does Equipment Financing for Small Business Work?

In many situations, the equipment you need can serve as collateral for the loan you obtain to get it. If, for example, you need a $20,000 convertible scaffold for your painting business, the scaffold is used to secure the loan. This is known as self-collateralizing in which the property itself is used as collateral instead of cash or other assets. In this example, if you are unable to pay as agreed, the lender can repossess the scaffold you bought and sell it to recoup their investment.

Self-collateralizing loans like equipment financing can be extremely beneficial for borrowers because you will not have to supply additional collateral to be approved for the loan.

In reality, if you buy new equipment, once you start using it, the value falls below what you paid, so the lender may not get all their money back. Furthermore, the lender is in the lending business, not the painting business. It is not in the lenders best interest to reclaim, appraise, and sell your scaffold (or any other equipment.) It’s a hassle, and they often won’t come out even, or ahead.

What’s the Best Equipment Financing for Small Businesses?

If your company is facing cash flow challenges, you can still get the equipment you need to operate your business. There are several financing options you can use to finance your equipment. For example, you may want to consider a business loan, a business credit card, or a business line of credit. All of these have advantages and disadvantages you should examine before committing to one form over another. 

Equipment financing if often preferred for small business owners because of the unique terms of the loan that are advantageous for most entrepreneurs.

How to Find an Equipment Financing Lender

To find the best equipment financing for small businesses, consider a loan broker like Llama Loan that will help you uncover the best terms and rates available. You can also consider your business bank or financial institution, but don’t assume they will offer the best rates.

Your equipment financing could be a short or long-term loan. It depends partly on the type of equipment you are financing and its cost.

For example, if you purchase something that will depreciate (lose value and usefulness) very quickly, you will probably only be able to obtain short-term financing. That’s why buying office equipment with short repayment periods is typical. The lender doesn’t want the computer to become obsolete even before you finish paying off the loan.

In contrast, equipment financing for small businesses can be obtained for a longer-term, if the equipment features a longer lifespan.

How Much Does Equipment Financing for Small Businesses Cost?

The rate and terms you can get for equipment financing will depend significantly on your credit and business history. That means your company credit and, most likely, your personal credit status as well.

If you own and operate a small business, the lender will rely on both your individual credit history as well as your businesses history for the approval process. However, you will still need to present detailed financial statements, including profit and loss, for the company. It may also be wise to submit your business plan, particularly if the new equipment will help you expand or improve operations to increase your approval chances. 

Interest rates for small business equipment financing cover a wide range. For example, you might get an interest rate as low as four percent with outstanding credit, or you could pay as much as thirty percent if you have some significant blemishes on your company or personal credit report. 

Do I Need a Down Payment for Equipment Financing?

The answer to this depends partly on your credit, the type of equipment you need, and the lender, but the short answer is “most likely.”

Lenders prefer down payments (just like car dealers) because that helps protect them if you default on the loan. If less than the total value is at risk, collecting the full amount of the loan is easier. In addition, if you have put money in, you are more likely to be committed to the financing.

Don’t look at the down payment as a disadvantage because it may help you obtain better financing terms for the equipment your small business needs. Plus, you can use a reasonable down payment to lower your payments overall – which can aid with any cash flow challenges.

What Are the Advantages of Equipment Financing?

One advantage of getting small business equipment financing is that you can improve your credit if you successfully make the payments on time and in full. This can help with your next loan, line of credit, or financing, saving you money in the future. 

If the equipment is heavy and durable, you may also gain a tax deduction for depreciation. Talk to your accountant about any tax savings, but consider it when calculating affordability. You may also be able to deduct some of the loan interest from your business income.

Being responsible about how you borrow for your business is one critical way to foster financial success.

Closing Thoughts

Equipment financing can be an affordable and advantageous financing option for your small business if you need new equipment.

Because equipment financing is self-collateralizing, you may not need a down payment or other assets to be approved for your loan.

By using a broker like Llama Loan, you can get access to the most affordable rates with the strongest terms available.

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