Visit Us

Finance & Accounting, Small Business Loans

How to Get Equipment Loans: A Guide

Equipment Loans

Last Updated on August, 23rd, 2017.

At some point in any small, large, or online business, it will be necessary to upgrade, improve upon, or replace various pieces of equipment. This is where equipment loans are a sort of lifeline to any business owner. They can mean the difference between success or failure when it comes to running a small business. But you may wonder what the benefits of equipment loans are and how to get equipment loans? What are the criteria that lenders look for before deciding to approve equipment loans?

Let’s begin by explaining what equipment loans are or if you’re looking for a loan, click here.

What is an Equipment Loan?

Equipment loans are loans to buy business equipment. Businesses will often have the need to purchase, replace, repair, or upgrade various kinds of equipment to process, manufacture, or produce their product. Equipment can include such things as medical and dental medical machinery; restaurant ovens, cookware, tables and chairs, linens, and catering supplies; phone systems; computer monitors, printers, copiers; furniture, tools, vehicles (for commercial use), specialized machinery, industrial equipment, and more. All of this equipment is essential for your business to run at maximum efficiency and maximum productivity. But what do you do when your equipment is old, worn, and needs to be replaced? Often you have the choice to either purchase new equipment outright or lease.

Loans or Leases?

When considering business equipment loans, know that you can also look into leasing the equipment. Here are some things to consider about leasing versus getting an equipment loan.

Equipment Leasing

Leasing typically does not require a down payment. This is especially beneficial for those businesses with little to no available capital. If a down payment is required, it is typically relatively small compared to what a traditional loan down payment would look like.

With a lease, you can finance around 100% of the cost of the item or items plus around 20 – 25% of the so-called “soft costs.” Soft costs include any taxes or delivery charges.

Leasing gives your small or online business a greater amount of flexibility. You can return the item at the end of the lease or you have the option to purchase it for a small amount once the principal of the loan has been paid in full.

Equipment Loans

Each lender will have different terms, but in general, with a loan, you can finance around 80% of the total purchase price of the item. When choosing to buy your equipment and finance through a loan, you own the item from day one. A down payment of around 20% is generally required for most small business equipment loans. The collateral for the loan is the item or items you purchase with the equipment loan.

Reasons to Get a Business Equipment Loan

·         To replace old equipment

·         To update older or out of date equipment

·         Add to your existing equipment inventory

How to Get Business Equipment Loans

Excellent credit is required for most equipment loans. After all, it’s an investment in your business and in your business’ growth and revenues. You may want to consider applying for a loan at the bank with whom you currently do most of your business. Or you may want to consider a nontraditional lender such as Kabbage, an online lender which offers assistance for small and online business owners in need of fast access to capital to grow their business. Business loans offered through Kabbage – sometimes referred to as Kabbage lines of credit – may be an option. A business loan gives businesses upfront cash in exchange for a percentage or a portion of future credit card sales.

If you have had strong sales, but struggle with little or bad credit, a business loan may be a particularly good option for your small or online business. Getting the capital you need when you need it can mean the difference between the success or failure of your business.

Note: You typically will not qualify for a line of credit for an equipment loan if you have a prior bankruptcy on file, if your business has been in existence for less than one year or if you do not already have the ability to process credit card payments for your customers. Make sure all of these things are in place before you apply to a traditional lender or to a nontraditional lender such as Kabbage.

Traditional lenders, such as banks, are often reluctant to extend traditional equipment loans to small or online businesses with poor or bad credit. Such businesses will be deemed “too risky” and will have great difficulty in securing a traditional bank loan for their business needs. This can be a problem for many small or online business owners who need the capital to purchase, replace or repair outdated or broken equipment. This is where a business loan can come in handy. A business loan gets you the money you need at a fast turnaround time so you can continue to run the day to day operations of your business.

Benefits of Equipment Loans

  • Quick Approval –Generally, equipment loans are approved (or denied) rather quickly. One way to speed up the process is to consider applying with a nontraditional lender such as Kabbage for your small business line of credit. Kabbage is an online lender that offers quick funds for multiple purposes including inventory, equipment upgrades and marketing efforts. Kabbage also considers your request within a matter of minutes. That means you can have the additional capital you need faster, so you can purchase or replace the equipment you need.
  • Tax Deductible – You may be able to deduct your equipment loan monthly payments as an “operating expense.”  Check with your lender as well as a business tax attorney to be sure.
  • More Money In Your Pocket – Keep cash-on-hand for other purchases you may need to run your business. Imagine one of your delivery trucks breaks down and needs to be replaced. Or the oven in your restaurant is on the fritz. Rather than spending money from your business revenues to pay for these very high-ticket items, equipment loans can be used to replace or repair this very expensive – and vital – a piece of equipment.
  • Flexible Payment Schedule –Depending on the lender from whom you secure your business equipment loans, you may be able to take advantage of flexible payment options. This comes in handy as you’re working to replace the equipment, continue running your business and also making payments on your business equipment loans. Some lenders may offer you the option of choosing monthly, seasonal, quarterly, biannual or even annual payments depending on the type of loan you secure. Note: you may also be able to take advantage of a 90-day deferment on repayment of your equipment loan. Again, work with your lender on your equipment loans to find out what works best for your business needs.
  • Approximately 25% of “Soft Costs” Covered –Soft costs include things such as fees, delivery charges and freight charges. Again, each lender is different, so be sure to do your research to know exactly what charges are applicable to the loan and which charges you will be responsible for covering.

The Steps to Getting an Equipment Loan

As your business grows, you will need to replenish your inventory, provide daily, monthly, and annual maintenance on key equipment, and ensure timely delivery of your product or services. Equipment loans are a vital resource to the small or online business owner.

Step 1: Make sure your credit is in good shape.

Had late credit card payments? Defaulted on some loans? A history of bad credit? All of these things will work against you when you apply for equipment loans. Most lenders will not extend any kind of loan to a small or online business that is deemed too risky. One of the most important – if not the most important – small business loan requirements is ensuring your credit is excellent. Preparation is key. Do your research ahead of time. Know your FICO score – a summary of your credit risk which lenders use to assess things such as whether or not to extend credit and if so, at what interest rate. You can identify your credit risk and find out your FICO score by employing free online tools such as the one at www.fico.com.

When meeting with potential lenders, come prepared to show not only your business credit history but your personal credit history as well. Got credit card debt? A few late car payments? Student loans in default? These kinds of things will delay if not halt the equipment loan approval process. Excellent credit is a fundamental aspect of small business loan requirements. Work aggressively to clean up your credit, fix any credit reporting errors (*Note: credit reporting errors do occur. Take time to read your credit reports thoroughly to ensure accuracy. Report any discrepancies immediately).

Step 2: Have a solid business plan.

Lenders – Traditional bank lenders and some nontraditional lenders – will look to your business plan as a roadmap of your future success. Identify your business. Describe your product or service. Detail your current cash flow system and project an aggressive, yet a realistic set of goals for your future business growth. Identify your target market, the socio and economic demographics of your primary market and then explain in detail how your product or service will fulfill a need within this market. Finally, summarize your entire business plan in a few paragraphs at the very beginning of your plan and call it the “Executive Summary.” This will give lenders a good synopsis of what your business is all about. A good business plan does not have to be pages and pages in length. However, it should be thorough and well thought out. There are many templates and examples of business plans online. Find one that works for you and implement it as part of your strategy to secure your equipment loans.

Step 3: Make sure you have an updated personal resume.

Even though you’re not applying for a job, a personal resume is a great resource to have when applying for equipment loans. Lenders of all kinds – traditional bank-based as well as nontraditional lenders – look to a personal resume for character traits that will support the small or online business plan. They want to see the person behind the business. And, since you will be responsible for repayment of the loan, lenders will want to make sure you’re a good credit risk for any equipment loans issued.

Step 4: Have cash flow statements at the ready.

Being able to show your money coming in and your money going out in current terms is a critical factor that most lenders require before issuing any kind of equipment loan. Get your finances in order. Hire a certified public accountant to go through your financial records. You’ll need to make sure you have both your personal and business financial statements in order and bulletproof – meaning the level of integrity in your reporting is accurate and ethical. It is one of the best indicators as to how your business is doing in the real world and it’s one of the main things lenders consider when reviewing small business loan requirements.

8 Times Your Business Can Benefit from an Equipment Loan

  1. YOU NEED NEW EQUIPMENT.

Clearly, the most popular reason business owners turn to equipment loans is because they need new equipment. Depending on your industry, you may need a new forklift so you can handle a special project, a wood burning stove so you can add pizzas to the menu of your restaurant or new office computers to streamline employee activities. Regardless of the type of equipment you need, an equipment loan can help make the purchase possible.

  1. YOUR EQUIPMENT NEEDS AN UPGRADE TO BE COMPETITIVE.

In some cases, you may need new equipment to replace old equipment or you may need new equipment so you can expand your offerings. Or, you may need to invest in new equipment even before it’s a dire need. Specifically, if you need more effective equipment to improve processes, maintain competitiveness in your industry or meet consumer demands, you may need to invest in your business with an equipment loan.

  1. REPAIRS ARE NO LONGER SUSTAINABLE.

If you are facing a repair of existing equipment, compare the projected repair costs with the cost of buying new equipment. In a surprising number of cases, repairs can be more expensive than replacements, especially if the repairs don’t get to the heart of the issue.

Do you anticipate repair costs outpacing replacement costs long before the end of the equipment’s lifespan? Are you constantly repairing the same piece of equipment over and over? Consider financial questions like these when deciding if an equipment loan has a more sustainable rate of return and is more affordable in the long run than repeatedly repairing old equipment.

  1. YOU DON’T WANT TO APPLY FOR A TRADITIONAL, DOCUMENTATION-HEAVY BUSINESS LOAN.

Another reason business owners turn to equipment loans is because they don’t have the time to navigate the traditional loan process. In most cases, to obtain a business loan you have to write a business plan, create detailed balance sheets and submit to a lengthy review process. Because the collateral on an equipment loan cuts down risk, these loans generally require less documentation, and that can be critical if you are trying to save time and money.

  1. YOU HAVE A DOWN PAYMENT FOR THE LOAN.

Although terms and conditions can vary, in many cases, equipment loans require a down payment worth up to 20 percent of the equipment’s purchase price. As a result, if you don’t have the right down payment, you may not be approved. However, some lenders fund 100 percent of the equipment’s cost for borrowers with great credit or in exchange for a higher interest rate.

  1. A NEW EQUIPMENT PURCHASE WOULD OFFSET YOUR TAX BURDEN.

When you make a new equipment purchase, you can typically write off the expense as a business expense, and if the purchase is eligible for the section 179 deduction, you can write off the entirety of the expense in the year of purchase, up to $500,000, rather than depreciating it slowly over time. That is true even if you use an equipment loan to finance the purchase. As a result, you may be able to write off the entire cost to lower your taxable income on paper and thus your tax liability, but you can still give your budget a break by paying for the equipment slowly over time.

  1. LEASING EQUIPMENT DOESN’T MAKE FINANCIAL SENSE.

In many cases, you can opt to lease a piece of equipment rather than buying it. This is exactly the same as leasing a vehicle. You pay a monthly or periodic lease fee, and at the end of the lease term, you return the equipment. At that point, you may be charged for any damage that occurred while the equipment was in your possession, but you also have the opportunity to buy the equipment, typically at a discount. Before accepting an equipment lease, crunch the numbers, and if an equipment loan is cheaper in the long run, take that option.

  1. YOU WANT TO PRESERVE WORKING CAPITAL.

Business owners who turn to equipment loans don’t necessarily have empty bank accounts. In many cases, these entrepreneurs could simply write a check for the equipment. However, a big equipment purchase has the ability to decimate your working capital. If you are trying to preserve your working capital, it may make sense to obtain an equipment loan and keep your business checking account well stocked to handle payroll, utilities, marketing and other expenses.

There are multiple signs that you may need an equipment loan. In addition to reasons mentioned above, before making your final decision, carefully consider the return on investment. How will the equipment improve your business? Will it increase revenues? Save time and lower payroll costs? Reduce your tax burden? Once you’ve mapped out the potential benefits from a financial standpoint, look at the cost of the loan and calculate whether the purchase offers the potential return on investment you need in the long run.

Note: Simply put, your cash flow statements – or profit and loss sheets – represent the revenue you have coming in and the expenses you have going out. The difference between the two – along with other factors such as fixed costs – helps you determine your profit margin.

While traditional loans are beneficial to small or online business owners, the time it takes to apply for the loan, process the application and wait for a decision can be cumbersome. Most small business owners need the cash quickly to replace, refurbish, repair or update equipment. Once you understand how to get an equipment loan, you’ll be able to position your small or online business for steady growth in the years to come.

Want to learn more about the Kabbage process? Check out these helpful links:

email

Kabbage Team

Kabbage is here not only to provide access to the small business funding you need, but to also help you grow your business through free marketing tips, webinars, tools and more. Is there something you'd like us to cover or want to get your small business featured on our blog? Send us a note at content@kabbage.com.