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How Does Equipment Financing Work For Businesses?

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How Does Equipment Financing Work For Businesses?

Business equipment isn’t cheap, whether you’re a construction company or a coffee roaster. You’re going to want equipment that will last for years to come.

Equipment financing will allow you to get the capital you need to invest in your business to make it grow like gangbusters.

Do you want to know more about equipment financing? Read on to learn how it works and how you can get the financing you need.

What is Equipment Financing?

When you need to invest in business equipment, you need to pay for it somehow. You can pay cash for the equipment or you can finance it by taking out a loan.

A lender will usually require some kind of security for the loan. They’re very unlikely to just hand over thousands of dollars without some kind of backup in case you default on your loan.

They may want to place a lien on the equipment until the loan is paid off. In that case, if you default on the loan, they can take the equipment.

In other cases, they may want a personal guarantee. This means that you give the lender a written guarantee that the equipment financing will be paid in full.

This could leave you vulnerable because if the business doesn’t pay the loan, the lender can go after your personal assets. That includes your home, car, and any other personal property that you own separately from the business.

How Much Can You Borrow?

These loans range in amount and terms. You can get a loan for as little as $5000 or as much as $100,000 or more. The terms will depend on how much the loan is for and what the interest rate is.

You may have a $5000 loan that is paid back in 36 months. On the other hand, you may have a $50,000 loan that is paid back in 7 years.

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It really depends on the needs of your business. A hairdresser will have vastly different equipment needs than a restaurant or a construction business.

Keep in mind that equipment financing doesn’t mean that the lender will fund the entire purchase. Most lenders will only fund 70%-80% of the purchase, leaving you to come up with 20%-30% for the down payment.

Financing vs. Leasing

When you’re shopping for equipment for your business, you may come across the option to lease the equipment instead of financing.

Leasing business equipment is similar to leasing a car. You pay monthly installment payments for a period of time to rent the equipment from the dealer.

At the end of the lease, you have the option to buy the equipment outright, renew the lease for another term, or return the equipment to the dealer.

Leases are an attractive option for some businesses because technology changes equipment. You can always trade your equipment in for a newer model at the end of the lease. On the downside, you’re always paying for something that you don’t own.

How to Get Equipment Financing

If you ever purchased a home, you may remember how hard it was to get approved for a home loan. You can expect similar difficulties with getting equipment financing, especially if you’re working with a traditional bank.

You’re going to need two things in order to get approved: your credit score and a business plan.

A business plan may be needed because banks want to see the prospect of business growth. They’re making an investment in your business and risking their money to help with your equipment purchase.

Lenders want to make sure that you can pay the loan back. You’ll need a business plan that includes your brand, target market, financials, and sales projections.

They also want to see stability. They want to know that you’re not going to close down your business overnight. There are lenders who have minimum revenue amounts and years in business before they will consider your loan application.

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They may want to see that you’ve been in business for at least three years with revenue of $300,000.

You’re also going to need your credit score. This will determine your ability to pay back the loan and the interest rate the lender will give you.

The higher your credit score, the less risk you are to the bank. The bank will give you a lower interest rate to secure your business with them.

Where to Get Business Financing

There are a number of places where you can get equipment financing. Of course, a bank is a good option. You have to meet their strict requirements in order to do so. They’re more likely to offer lower interest rates.

What if you are a new business or you have bad credit? There are online lenders that will help with equipment financing. They have less stringent requirements. They may also have higher interest rates to secure the loan.

Equipment Financing to Grow Your Business

They say that it takes money to make money. If you want to grow your business, you need to invest in it. You’ll need to invest in equipment so you can increase your business’ capacity.

Equipment financing can give you the money you need to purchase the equipment to grow. You need to make sure that you understand the terms of the deal, such as how the financing is secured. You also need to come up with a percentage of the purchase amount.

In the end, you’ll have the equipment you need to take your business up a level.

Do you want more business tips? Come back to the business section of the blog regularly for more business articles.

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