What Is An Equipment Loan And How Does It Work?

Monty Rakusen/Getty Images; Illustration by Austin Courregé/Bankrate

Whether your company needs a copier machine, restaurant equipment or a semi truck, you may be able to save capital and get the equipment you need with an equipment loan.

Offered by banks and online lenders, equipment financing can help business owners buy equipment to start or grow a business or repair or upgrade old equipment to remain competitive.

The best equipment loans tend to lower eligibility requirements compared to other loans. But while these loans are accessible, they’re not the only option available for buying equipment. Explore the ins and outs of getting an equipment loan, how they work and whether they’re the best option for your business.

What is equipment financing?

Equipment financing is a loan you take out to buy a specific piece of business equipment.

And in this case, equipment can be pretty broad. Companies take out equipment loans to finance the purchase of:

• Computers
• Office furniture
• Vehicles for commercial use
• Machinery
• Commercial kitchen equipment
• HVAC units
• Phone systems
• Printers and copiers
• Medical equipment
• Industrial equipment

In other words, if your company needs to make a big purchase of a tangible asset, an equipment loan can help you break it into manageable payments that you make over time.

You can get several types of equipment financing, including equipment leases, lines of credit or SBA 504 loans. The exact loan you choose will determine the features it has. For example, an equipment lease may not have any down payment and may include taking care of maintenance repairs.

How does equipment financing work?

Business equipment financing works by providing you with a sum of money that you use to purchase equipment. The equipment you purchase becomes the collateral to secure the loan. You then pay back the loan in fixed payments with interest over a set term, usually one to five years.

Because the equipment is used as collateral, the lender has the right to seize the equipment if you fail to make payments and default. Like most business loans, you may also have to provide a personal guarantee, which requires you to be personally responsible for the loan if your business can’t pay the loan back. This puts your personal assets at risk.

While it seems risky to get an equipment loan, having collateral lowers the risk for the lender. The lender then rewards you with lower interest rates and favorable repayment terms that help you receive manageable repayments.

The lender may also require a down payment for the loan, anywhere from 10 percent to 20 percent. However, you can find business equipment loans with 100 percent financing, such as U.S. Bank equipment loans, so no down payment.

Business equipment loan vs. equipment leasing

Equipment leasing allows you to rent equipment from the leasing company rather than buying and owning the equipment outright. Equipment leasing typically doesn’t require a down payment, making it a better option for business owners who can’t afford to tie up funds to purchase equipment.

Another advantage to leasing is that it can protect you from depreciation or obsolescence. If you’re buying something that won’t be worth much — or even functioning or relevant — by the time your loan term ends, owning the asset doesn’t go very far.

To determine whether equipment leasing or equipment financing is right for you, consider how much the equipment will be worth when the financing ends. Then, consider which option helps you pay less overall.

Equipment loan eligibility requirements

As with any financing, banks, credit unions and equipment financing companies vet you before offering you the loan. They will look at several factors to determine if you’re eligible for the business equipment loan:

• Your business credit score: If you’ve built business credit, lenders will want to see a healthy business credit score showcasing that you manage your business finances well.
• Your personal credit score: Lenders often look at personal credit along with business credit. They often want to see a minimum of 600 or above, and banks typically like to see a score of at least 670 or higher.
• How long you’ve been in business: Banks usually require you to be in business for one to two years, but you can find online lenders that accept as little as six months in business.
• Your business annual revenue: Most lenders require at least $100,000 in annual revenue, sometimes less. Banks tend to want to see $150,000 to $250,000 in revenue.
• Business financial documents: Lenders will look at your financial documents, including your balance sheet, profit and loss statements, equipment appraisals, business bank statements and tax returns.

Bottom line

A business equipment loan can enable your business to buy even expensive tangible assets that will help it thrive. Since the equipment secures the loan, business loan requirements tend to be lenient, making it an accessible option for startups and bad credit borrowers.

To make sure you find the best deal, evaluate options from at least a few equipment lenders before you sign on the dotted line. If an equipment loan isn’t right for you, you can look into other business loan alternatives to help you get the financing you need.

Frequently asked questions

• What are typical terms for equipment loans?

  Usually, equipment loans must be repaid between one and five years, though some go longer such as seven or eight years.

• What credit score is needed for an equipment loan?

  Generally, you’ll need a personal credit score of 600 or more. That said, a credit score is just one factor lenders consider. A bigger down payment, more time in business, other collateral and solid annual revenue at your company can all help to make up for poor credit.

• Is it hard to get a loan for equipment?

  Generally, getting an equipment loan is easier than other types of small business loans. This is thanks, in part, to the fact that the equipment serves as its own collateral for the loan. Because of its lower risk, lenders often lower eligibility requirements to apply.