You can use most business loans on equipment, but not all loans are equipment financing. Equipment financing manifests a specialized form of funding structured to get physical (or software) assets into businesses’ hands. If you are looking for equipment funding, you are looking for a loan that uses the equipment you’re buying as security or looking for a lease. Because it’s a more niche form of financing, it can be a little more challenging to track down equipment financers than ones who deal in working capital. Let us try to give you a head start by showing you how to find equipment financers and present some of the best equipment financers today.
How does equipment financing actually work?
Equipment finance offers you access to whatever important business equipment you require without paying for it upfront. Rather, you can receive the money you require from a financer and then pay off your purchase over a set repayment duration. In simple words, you get all the benefits of ownership before you really own the equipment. Nonetheless, there are several different financing routes you can choose to go with, including taking out a loan or a finance lease.
Finding equipment financers
In most situations, the same lenders you would go to to look for any other financing type also provide some form of equipment financing. The majority of traditional banks and some credit unions can provide equipment loans and even, in some cases, equipment leases.
With online lenders, it is a bit trickier. Most do not provide equipment financing, or if they do, it is not a true equipment lease or loan; it is just a loan you can use to purchase equipment. On the contrary, some online lenders deal mainly with equipment financing. Either way, ensure you know what type of equipment loan or lease you are signing up for. Most of the third-party equipment financers also sell used equipment that has been returned to them by previous borrowers. A final alternative is to deal with a captive lessor. These are equipment dealers who provide in-house financing on the equipment you’re acquiring.
How do I compare financers that provide equipment loans?
- Identify the interest rate: The interest rate provided will obviously affect how much money you pay over the life of your equipment loan, so look for a lender that offers a low rate of interest. You will also have to consider if you want the security of a fixed rate or the probability of saving that a variable rate offers.
- Compare the charges and fees: Anytime you sign up for any financial product, it pays to ensure you are familiar with all the charges and fees attached to the deal. Read all product information keenly to know if the finance option you select attracts fees like early repayment fees and an establishment fee.
- Identify if there are any taxation benefits: The range of equipment financing options are evaluated differently when tax time rolls around. Every approach has its own potential tax benefits, so consult your accountant to learn which one best suits your business.
- What are the equipment loan terms? How long can you clear your asset? Terms generally scope from one to seven years; thus, look for equipment finance that provides a term suited to your financial case.
- Are there flexible repayment options? How often does every vehicle finance option allow you to make repayments? Look for a loan that allows you to schedule your repayments in a way that suits your budget.
- Some equipment leases are effectively purchases: Capital leases, though still technically leases, are structured to transfer ownership to the borrower. The main difference between a loan and capital leases is that the latter usually does not have a down payment (beyond the first and maybe last month’s payment), and it is more likely to cover soft costs, like shipping. However, loans will generally have lower interest rates.
How to finance business equipment purchases?
Most common ways to finance your business equipment purchases
- Equipment loan or Commercial loan: This is possibly the type of equipment finance most business owners are confident with. As a secured business financing, the asset you want to buy will be used to secure the loan. This indicates that you own the item in question and can claim any interest depreciation and charges of the asset as tax deductions.
- Business credit cards: Ground on the type of equipment you are buying, you might want to utilize a business credit card; business credit cards provide a few advantages. For instance, you can get an interest-free period on purchases using a 0-percent APR business card.
- Finance lease: A finance lease engages a lender buying the asset you need and then renting it out to a company for an agreed duration. You can select from flexible repayment terms to fit your budget, while the lease payments you make are usually tax-deductible.
The top equipment financing companies for small businesses in 2020
An overview of the best equipment financers of 2020
Crest Capital is a venerable equipment provider offering a respectable variety of leases to established companies with a decent credit score. The financer takes great pains to make information about its products available, which makes it easier to know what you are walking into. Just be aware that it charges an administration fee on its equipment leases, which does add some cost to the procedure.
Crest’s lease offerings are extensive enough to cover most businesses’ circumstances, though you will not find a traditional equipment loan here. The biggest issue potential lessees are likely to run into with Crest is the company’s relatively high borrowing requirements. The lessee should have a credit score of at least 650. You will also need to have been in business for at least two years.
You may not think of Small Business Administration loans when you are thinking of equipment financing; however, you can use an SBA 7(a) loan to buy equipment for your business. It is a good option for businesses that require a lot of money but do not need it immediately. SmartBiz specializes in guiding companies through the bureaucracy of applying for an SBA loan and making it as easy as possible. SmartBiz does not originate the loans; instead, it will help connect you with a bank that does.
For businesses seeking a traditional equipment loan that also happen to be franchisees, it is worth considering ApplePie Capital. This financer works with over forty big-name franchises, including Dunkin’ Donuts and 7-Eleven. ApplePie specializes in delivering funds faster to businesses belonging to one of its partner franchises; however, it can finance other franchises if you don’t mind waiting longer.
OnDeck is well-known in online lending thanks mainly to low credit qualifications and a fast application process. It does not prominently advertise its equipment loans; however, it is an option for those businesses looking to borrow from a well-established lender. A borrower must have a credit score of 600 or better and business revenue of at least $100K per year to qualify. You also need to have been in business for at least one year.
TCF Capital Solutions
TCF provides a broad range of equipment financing options to well-established companies at reasonable interest rates, catering to borrowers interested in purchasing or leasing. You will find everything from operating leases, equipment loans to capital leases here. However, the company is a bit on the conservative side, requiring a credit score of 700 or more and five years in business.
Generally, Currency is a third-party loan aggregator linking businesses to financers by way of its lending platform. Whereas Currency does not originate its own loans, it is inclined to working with lower credit scores ( that is, 585+) than the vast majority of equipment lenders. With loan amounts of up to $2 million, Currency can also provide a wide variety of business needs. Currency’s biggest shortcoming is that your loan’s specifics might vary widely based on the lender you get paired with; you won’t have too much information ahead of time.
US Business Funding
US Business Funding provides several leasing agreements, ranging from sales leaseback to fair market value (FMV). The company has a relatively quick turnaround (two to seven days) and competitive interest rates. While the borrower qualifications are a little more lenient than other small business lenders’, they are also vague. US Business Funding prefers you have been in business for two years but may be willing to work with newer companies with excellent credit.
What should you consider avoiding when it comes to equipment financing?
The main pitfall to avoid with equipment financing is getting into a financial agreement that you simply cannot afford to service. It is essential to consider how essential any equipment is before you commit to a purchase and ascertain you are aware of your ability to make repayments on time. Another common pitfall that some people can get confused by is the array of equipment finance options available. Seeking assistance from your accountant is one way to go to ensure you make the right choice.