Small Business Equipment Financing- How to Secure a Loan
Whether it's due to general wear and tear, accidents, or the introduction of newer models, equipment rarely lasts forever. This is where small business equipment financing comes in.
For a mom-and-pop shop or startup business, purchasing new equipment can be a large investment and they may not have the capital on hand to afford it upfront. In order to obtain these essential appliances or pay for repairs, small businesses can turn to banks and lenders for business funding.
Equipment Lease vs. Loans
Equipment leasing may appear like a more affordable alternative in the short term as this generally does not require a down payment. However, at the end of this lease, businesses will usually have to return the item or pay an additional amount to purchase the equipment. Meaning, business owners can end up paying more to rent the equipment than they would have to purchase it in the long term.
For a small business to secure an equipment loan, they will agree to a schedule of periodic payments (often monthly payments) over a fixed term that includes the principal and interest payment amount.
The lender generally uses the equipment as collateral for the loan as security against the debt. Some lenders may also require additional personal guarantees or business assets. If the business is somehow unable to meet the loan payment requirements in the future, it would result in the repossession of these assets. However, once the loan is paid out, the business will have full ownership of the equipment.
The Purpose of an Equipment Loan
The most common business financing options for equipment involves obtaining loans. On average, loaning allows businesses to finance 80% of the item's purchase price.
To secure the equipment, a down payment of 20% is the general requirement, and there are different loan amounts available, each with different rates. There are various reasons why an equipment loan may be necessary.
- Needing new equipment to run the business (new systems/operations that require additional tools)
- Replacing damaged equipment (repairs are no longer cost-effective)
- Upgrading equipment (to stay competitive in the industry)
- More accessible than a full business loan (equipment loans are more simple and less risky)
- When leasing isn't the most cost-effective strategy for your needs (being able to own the equipment after short or long term loans)
- To preserve working capital for expenses like marketing, utilities, and payroll
Rates and Loan Terms of Equipment Financing
The loan type, the lender's requirements, the applicant's qualifications, and the current market conditions all come into play to determine the payment options in fixed rates and terms.
Common terms that could be expected are-
- Ratio of Loan to Value - Up to 100%
- Repayment Terms - Several months, 1, 5 or 10 years (or more)
- Fixed Interest Rates - 4.00% up to 13%
- Speed of Funding - From 2 business days
- Additional Requirements - Minimum credit score, operating history information (like business checking accounts)
Tips for Getting a Small Business Equipment Loan
Financing equipment is oftentimes a big investment and commitment for smaller businesses. Therefore, a loan is a vital resource for growing companies looking to scale their operations. It is important to know how to secure an equipment loan successfully to boost the chances of getting approved. The following tips will enhance the prospect of loan application approval.
1. Assess Your Credit History
If a business owner has a bad credit history, it's unlikely that the lender will approve the proposed loan application, as it is too risky for them to feel confident in the debt being repaid.
Look over your bank account and credit report history to be sure that you have the appropriate credit score to be approved for the loan. Research minimum credit scores needed for loan consideration and examine your history of both personal loans (including car and student loans) and business credit cards to get a well-rounded view of the credit score.
2. Have a Clear Business Plan
A company's business plan is essential for securing financing of any kind. This document details the product or service description, market analysis, target market information, employee and management models, and the essential equipment your business will need.
It should go over the most relevant points so an outside party can understand how your business will, or already does, operate. There are sample business plans online, and many consulting agencies in various industries who can also create business plans for companies for a price.
3. Include a Personal Resume
This resource is valuable when applying for equipment loans as lenders tend to examine personal resumes to get an idea of the character of the business owners. After all, managing the repayments of a loan is a personal process. Lenders will be looking for business professionals with reliable character, passion, and experience.
4. Provide Cash Flow Financial Statements
This could be the most critical factor for a lender to know whether a business has the means to meet the loan repayment schedule. The cash flow statement should not only reflect the annual revenue of a business but also it's projected sales and losses. Companies can produce cash flow forecasts using sophisticated software to show lenders the long term profitability and scalability of the business.