Equipment financing: How it works, interest rates & funding options

As a business owner, you’ll agree that the early years can be exhilarating, especially when juggling between maintaining the needed cashflow for day-to-day operations and sourcing the right equipment to increase productivity. 

Regardless of the industry, having the right tools is key to an SMB’s growth. 

However, due to their high costs, it can take some time for a company to scale quickly and increase revenue.

Thankfully, a silver lining exists – equipment financing. 

This type of business loan helps secure the necessary equipment without draining your cash reserves. 

In this post, we’ll explain how it works, its different types, and its advantages and disadvantages. 

What is equipment financing?

Equipment financing is a loan or lease that allows businesses to borrow money specifically to purchase business-related equipment, vehicles, or machinery — which can be a significant hurdle for an organization. 

With this financing method, they can break down the cost into small, manageable installments and pay over a set period.

Many small and medium-sized businesses struggle to balance their books while ensuring smooth operations. 

According to Zippia reports, 82% of small businesses today face the issue of cash availability. 

Therefore, with this financing option, companies can better control their cashflow, pay their debts over time, and maintain overall profitability.

Exploring 5 equipment finance options

Exploring equipment finance options is essential for businesses aiming to acquire the necessary tools without straining their budgets. 

Each option offers unique benefits tailored to different needs. Let’s consider them below:

1. Term loans

Term loans allow you to borrow and repay a lump sum over a set period, usually five to ten years. They are either secured or unsecured. 

Secured loans are backed by business assets, which means lower interest rates and better favorable terms. 

If you default in your payment, the lender can seize your asset.

2. SBA loans

The Small Business Administration (SBA) loans offer lower rates and require only a 10% down payment. 

However, the application process may take weeks to finalize. 

First, you’ll need to apply via an SBA-approved lender and research various loan options. 

SBA loans include: 

• 7(a) loans, which cover general expenses; 
• 504 loans, which are ideal for purchasing large equipment; 
• Microloans, which are great for newer businesses and offer up to $50,000 for equipment.

3. Equipment loans

Equipment loans are specifically designed to finance equipment purchases and are backed by the equipment.

This reduces risk for lenders and lowers upfront costs. 

They often have more lenient eligibility requirements, making them accessible even to businesses with less-than-perfect credit scores.

According to a Small Business Credit Survey, 13% of small business loan applications were for equipment loans, with 73% of those getting full approval. 

This highlights the practicality and effectiveness of these loan types.

4. Equipment lease

This option offers smaller monthly installments and requires no down payment. Equipment leases are of two kinds: 

• Operating and capital leases: Companies can use the equipment for the lease term and return it in good condition.
• Capital leases: Enables businesses to purchase the equipment at the end of the lease. Repayment terms are usually lower, with a balloon payment required when the loan ends. 

5. Business line of credit

A business line of credit works like a credit card.

With a set limit by the lender, you can withdraw and repay funds as needed. 

Also, you pay interest only on the amount used. This flexibility makes this loan type excellent for smaller, frequent equipment purchases.

How to get equipment finance in 5 easy steps

Getting the right equipment financing can vary depending on the lender. 

However, here’s a straightforward guide to help you through the process:

1. Assess your needs

The first step is to determine how much you need to borrow and whether purchasing such equipment is really necessary. 

You should also consider whether this new tool will boost your business’ efficiency or competitive edge.

3. Consider your personal and business credit scores

Lenders often verify personal and business credit scores to determine how likely an individual is to pay loans related to equipment finance. 

So, check your credit score to identify areas you’ll need to improve. 

Typically, you need a credit score of at least 650 to qualify.

4. Explore various lender options

While lenders are there to help enhance your business growth, their operations differ.

Therefore, compare lenders to find the best financing options, interest rates, and repayment terms that suit your budget. 

This ensures you get a fair deal that aligns with your business needs.

5. Apply for equipment financing

Once you find the right lender, it’s time to submit your final application. 

Ensure that you check their specific requirements and follow due process. You can apply online or at a local branch.

What is the interest rate on an equipment loan?

The interest rate on an equipment loan typically ranges from 7% to 20%. This variation depends on your credit score. 

If you boast a high credit score, you can expect to secure a lower rate, potentially saving you hundreds or even thousands of dollars over the life of the loan.

Therefore, maintaining a good credit score is key when considering an equipment loan, as it directly impacts the amount you’ll end up paying.

Equipment finance advantage

There are significant pros to leveraging this type of business loan in your organization. 

Here are three key equipment finance advantages:

1. It’s easily accessible to businesses of all sizes

This loan type is available from many lenders and banks. 

They often introduce a lenient eligibility process, which makes them easily accessible to any startup or business with less-than-perfect credit. 

Additionally, regardless of your industry, you can obtain an equipment loan at any time.

2. Businesses can enjoy fast funding

Many lenders, especially those online, offer quick financing. 

You can receive funds within a day, allowing you to swiftly utilize this tool to enhance your business operations.

3. It requires no additional collateral

When you take equipment loans, the tool you purchase becomes your collateral. 

So, there’s no need to secure the loan with additional assets. This makes obtaining financing for your SMB operations easier and less risky.

Explore situations in which you should use international invoice finance.

Equipment finance disadvantage

Despite its benefits, it’s essential to note certain drawbacks before applying. Here are a few to consider:

1. It’s limited to purchasing equipment

Equipment financing is only useful for purchasing or repairing business tools.

However, if you need funding for other business expenses, you must explore alternative loan types with your preferred lender.

2. It may require a downpayment

These loan types may require you to make a down payment, which can be as much as 20% of the equipment’s cost. 

So, if you want to buy expensive machinery, you’ll need to pay a significant cash amount upfront. 

Leasing might be a better option if you can’t afford the down payment.

3. Loan repayment could outlast equipment lifespan

There’s a risk that the loan’s payment term could outlast the machinery’s lifespan. 

For instance, you secure 10-year funding for a piece of equipment. 

However, the machine becomes obsolete after five years of operation. 

Now, you are stuck with repaying five extra years on a machine that is no longer operational. 

Is it better to buy or finance equipment?

The better choice is to finance equipment. With this approach, you borrow funds to get the tools your business needs and pay back over time. 

As such, you don’t drain your cash reserves, which can be channeled to other important business areas.

Let’s consider this scenario. Imagine you put $10,000 into a new delivery truck for your food business. 

However, an emergency arises. Since you’ve paid in full, you may be left without much financial safety net to resolve this situation. 

Conversely, when you finance the truck, cash becomes available to handle expenses and unexpected circumstances.

Notably, opting for finance comes with flexible terms. It becomes easier to manage monthly payments without straining your budget. 

Ultimately, you have control over your cashflow while focusing on your business growth.

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Read our expert guide on what is debt financing?

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3 alternatives to equipment financing 

If this loan type isn’t the right fit for your SMB, other options exist. They can offer more flexibility, quicker approval times, and tailored solutions to fit your unique business needs. 

Let’s consider three alternatives to equipment financing below:

1. Business credit cards

Some businesses use credit cards to finance smaller equipment purchases. 

While convenient, credit cards come with higher interest rates than traditional loans.

Pros: Easy to use, no collateral required.

Cons: High interest rates, which can lead to debt accumulation.

2. Vendor financing

Sometimes, you may not need to go through a specialized lender. Some equipment suppliers offer financing directly to their customers. 

This makes the purchasing process easy and may include friendly rates.

Pros: It offers convenience and potentially lower rates.

Cons: It’s limited to the vendor’s offerings. It could also require a strong business credit.

3. Revenue-based financing

Revenue-based financing (RBF) is a type of funding where investors inject capital into a business in exchange for a percentage of future revenue.

It’s an excellent option for companies with fluctuating income.

Pros: No fixed payments, and it’s very flexible.

Cons: It may become expensive over time, which isn't too great for a business facing economic uncertainties.

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Learn more about the importance of forecasting in your business.

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Apply for financing with Stenn

There you go! Equipment financing is certainly an excellent loan option for businesses. It allows them to acquire essential machinery and tools without a hefty upfront cost. 

By spreading the expense over time, companies can maintain healthy cashflow and invest in growth. 

Indeed, navigating the fierce financing landscape as an SMB can seem daunting. However, with the right partner, it can be a smooth sail. 

Interestingly, Stenn can be a reliable ally in delivering flexible, tailored financing options that can help you scale.

With our streamlined process, you can receive funding quickly, often within 48 hours, allowing you to seize opportunities without delay. Trust us to provide transparent and ethical financing options that align with your growth. Explore our revenue-based financing option today to fund the right equipment that will empower your business for long-term success.