There comes a time when all business owners want to further grow the business, expand production capabilities, and increase efficiency. Having the right equipment can fuel this growth. However, many business owners do not have the cash up front to purchase highly specialized equipment. Obtaining an equipment loan can give you the ability to upgrade, improve upon, or replace equipment for the long-term. If you’re curious how an equipment loan can benefit your business, how to obtain an equipment loan or what criteria lenders seek when applying for financing, let’s dive into all you need to know when considering an equipment loan.
What Is An Equipment Loan?
An equipment loan is typically used by small businesses looking to preserve cash by taking the cost of the equipment and spreading it out in equal payments. Equipment loans can be used to replace existing equipment, refinance equipment, or to purchase new equipment as your small business grows. Equipment loans are used to purchase business-related equipment, such as restaurant kitchen supplies and appliances; telephone and computer systems; furniture, specialized machinery, a commercial vehicle, and more.
What Are the Advantages of Obtaining an Equipment Loan?
1. Conserve cash: There are countless fixed expenses when running a business. When a business decides to utilize equipment financing rather than invest a large sum of cash in equipment purchases, you can conserve cash for other operating expenses or emergencies.
2. Sharpen your competitive edge: With equipment financing, your business can take advantage of having state-of-the-art technology and the efficiency that comes with new equipment. This in turn will drive productivity, increase customer satisfaction, and give you a competitive advantage.
3. Maximize tax breaks: With equipment financing, the borrowing business will make payments to the lender over the course of the agreed terms. For most equipment financing terms, the interest paid on the financing payments can be written off as tax-deductible, reducing your tax bill. Section 179 is a tax incentive designed to help businesses which allows you to treat qualifying assets as business expenses and expense the costs of those assets immediately.
4. Build business credit: If you make timely repayments on your loan, this will contribute to building your credit which is essential for businesses that are looking to obtain future capital as their business grows.
Equipment Financing: Understanding Your Options
Here are three forms of financing you should consider as you approach equipment purchases:
Term Loan: Many small business owners look to term loans as a way to finance expensive equipment purchases. These loans can provide amounts as large as $2 million. Depending on your unique situation, you may qualify for a loan with low interest rates. The repayment term will usually go up to 5 years or the useful life of the equipment.
Short Term Loan: This type of financing is a common option for equipment expenses reaching $500,000. Interest rates tend to be higher, and the repayment terms usually range from 1–3 years.
SBA Loans: The Small Business Administration (SBA) guarantees loans offered by approved lenders allowing qualifying borrowers to access better rates and terms than they would normally be able to. Both SBA 7(a) and 504 loans can be used for equipment purchases. The 504 loan is commonly used to finance large machinery purchases and 7(a) loan is an option for financing other equipment.
Steps to Obtain Business Equipment Loans
Obtaining an equipment loan is fairly straight forward. Once you fill out an application, with the right qualifications, prep work and organization, you can be approved quickly.
Step 1: Provide good credit scores. Good credit is a requirement for most equipment loans. Do your research ahead of time— know your credit score. Online credit ratings give you an idea of how high or low your credit rating stands. Your credit score is one component that will determine how favorable your loan interest rates and terms may be.
Step 2: Demonstrate financial health. Your business plan and financial reports are a roadmap that show lenders the past and projected future success of the business. Lenders want proof of your financial fitness so be sure to organize important documents such as: bank statements, tax returns, business registrations, financial statements, proof of collateral, a business plan and even lending history. Most lenders require your business to be established for at least six months.
Step 3: Equipment requirement: As part of your business plan, lenders will want to know your goals with your equipment purchase. It’s a good idea to document the type of equipment you need to operate your business and how it will further contribute to your business success.
Terms and Rates
The range for interest rates and terms differ depending on the type of loan, a borrower’s credit history, and the cost of equipment being financed.
Whether your business needs to replace faulty machinery or wants to upgrade to more high-tech, cost-effective equipment, you have many options.
Hit the Let's Connect button to explore the right equipment financing options for your business at Savoy Bank. Our Lending Team is here to help.
Mac Wilcox is the President and Chief Executive Officer of Savoy Bank. With more than 20 years of experience as a banking leader and entrepreneur, Mac is a strong believer in small businesses and the power of local entrepreneurs to drive economic development and growth