Your Guide to Small Business Equipment Financing Options
It’s a well-known fact that 82% of small businesses fail due to cash flow problems. It’s hard to generate the amount of income you need for the first few years in business while you’re still getting established.
Getting the finances to fund your business in the first place is a problem for small business owners, as well. 27% of small business owners aren’t able to procure the financing they need to their business’ success.
We’re going to help you avoid that pitfall. Here’s what you need to know about business equipment financing.
Your Guide To Small Business Equipment Financing
Equipment financing can come in several forms. What works for one company might not be useful for another.
To begin, let’s learn a bit about what we mean by business equipment financing.
What Is Equipment Financing?
Equipment financing is meant specifically for purchasing business equipment. You make payments towards the loan you took out for the equipment. When it’s paid off, you own the equipment, no strings attached.
With certain kinds of small business equipment loans, no collateral is necessary. The equipment itself is the collateral. If you default on your payments, the lender takes ownership of the equipment.
Lenders also have the option of requiring a blanket lien to protect their investment. A blanket lien allows the lender to take possession of all of your business assets, including your equipment, if you default on your loan.
They may also instate a personal requirement. This puts your personal assets up as collateral in case you can’t make your loan payments. Make sure you know what you’re signing up for when you’re filling out your loan agreement.
Equipment Financing Vs. Leasing
There are numerous types of equipment financing available. You don’t need to necessarily own your equipment. Leasing is also an option.
Leasing your small business equipment means you’re renting it from its owner. It becomes a part of your monthly expenditure. Sometimes, you’re able to renew your lease at the end of its term.
You may also be given the opportunity to buy it outright.
Leasing equipment is a good choice if you’re experiencing cash flow problems. You’re not generally required to make any kind of down payment. You often won’t have to put up any collateral, either.
Leasing business equipment has its drawbacks, as well. It can often end up costing more than it would to just purchase it outright by the time your lease is finished.
Equipment Financing Options
The type of commercial equipment financing you decide upon will depend on several factors. Some of these factors include:
- Personal credit score
- How long you’ve been in business
- Annual revenue
- Intended loan amount
- Terms of repayment
Here are some of the most common equipment loans you’ll come across.
Equipment loans are the closest to the types we discussed earlier. With an equipment loan the equipment itself acts as the collateral. Some lenders may still require a 20% down payment, however.
Repayment terms may be as short as 3 years and as long as 10, depending on how much you’re borrowing. Loan limits can reach as high as $500,000. The typical annual percentage rate is between 8% and 30%.
Equipment loans can often be fulfilled in a very short amount of time. Sometimes they can take as little as two days to go through. Many equipment loan lenders operate entirely online. They have less of an infrastructure to support so their process tends to be much more streamlined and efficient.
You usually don’t need perfect credit to qualify for an equipment loan. Some lenders may require you to have been in business for a year or more, however. You may have to look into other options if you’re just starting out.
Term loans are another great option for small business owners needing to finance equipment quickly. Term loans are paid back over a set period of time. They operate similarly to a mortgage or a car loan.
Term loans may also require your equipment to be put up as collateral. If you don’t want to use your business equipment to underwrite the term loan, you may be asked to put another business aspect forward as collateral instead.
Term loan lenders tend to have stricter credit criteria than equipment loans. It’s possible to get an equipment loan with a credit score as low as 600.
To qualify for an equipment loan, however, you often need to have been in business for two years or more. You might have to have an annual revenue of at least $200,000 and a personal credit score of 660 or better.
While the terms may be stricter, this can work in your benefit. It can help you secure a lower interest rate. It can also help you qualify for a lower origination fee, which requires you to borrow less money.
This can save you thousands of dollars over the span of the loan.
Finding the right lending option helps set your small business up for success. It lets you find a payment arrangement that works for you while still letting your business thrive. It levels the playing field, helping you to remain competitive even if your personal credit is less-than-perfect.
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