What Kind Of Business Equipment Can You Finance?
You can finance most types of equipment, depending on the lender you choose. Essentially, any legal piece of equipment you need to run your business can be financed in some way. Here are a few specific examples, though:
- Heavy equipment like tractors, backhoes, and excavators.
- Company vehicles used for business purposes.
- Furniture for offices including desks, chairs, and other accessories.
- Medical and dental equipment.
- Phone and voicemail systems you’d see in an office setting.
- Computers, desktops, and laptops.
- Restaurant equipment like ovens and mixers.
The list can go on, but this gives you a sampling of what you can finance. On the other hand, the things you can’t finance is a shorter list. Typically, you can’t always finance a property, since that’s a separate loan called a commercial real estate loan. Additionally, rare or specialty equipment you may not be able to finance since a lender can’t get an average on how much they should realistically be lending you.
How To Qualify For an Equipment Loan
What you’ll need to present for paperwork will largely depend on the lender you choose. Some simply have more rigorous standards than others. For example, online lenders and big-name banks will likely have a longer application process than your local credit union, so consider this when applying.
Generally, you’ll need the following to stand a chance of qualifying for an equipment loan:
- A good credit score. You don’t need a good score, but having one is going to make the process a whole lot easier. Plus, you’ll qualify for the best rates, reducing how much you’ll pay over the life of the loan.
- At least a short history as a business. Most lenders won’t offer financing to brand new businesses, since they can’t be sure the business will do well and they can’t be sure they’ll get paid. You’ll likely need to be in business for at least six months before qualifying for financing.
- Proper financial statements that are organized well. If you have an accountant who organizes your financials, they’ll be your best friend during the equipment financing process. You’ll need quite a bit of documentation including business licenses, profit and loss statements, and more.
Equipment Loans For a Startup - Pros and Cons
While those with good credit will generally qualify for some decent loan opportunities, anyone considering taking out a loan should consider the pros and cons.
Pros:
- You can finance over time. Equipment can be expensive, so coming up with the cash upfront can be impossible. Getting heavy equipment financing can help you pay down the balance over time, hopefully with a decent interest rate.
- You’ll get a tax deduction. To help businesses, the IRS offers tax deductions for qualifying equipment purchases. In 2022, you can deduct up to $1,080,000.
- You’ll have a more flexible cash flow. When you’re paying smaller amounts month-to-month, your business has money available to save or spend elsewhere. If you need equipment at the same time you’re trying to grow the business as a whole, having the extra cash flow can help you hire additional employees.
Cons:
- Only good credit borrowers will get a good deal. In the loan world, the higher your credit score, the lower your interest rates, and the better your chances of approval. Those with good credit will fare fine, but those with bad credit may have a difficult time finding the terms they want.
- You’ll often need to come up with a down payment. Some lenders will require a down payment. 20% is a common number, so be prepared to pay some towards your new equipment purchase.
- If you default, the equipment will likely be collateral. If you can’t make payments, oftentimes lenders will use the equipment as collateral. They’ll seize the equipment if you continue to miss payments and then you’ll be stuck empty-handed.
Can You Get Startup Equipment Financing With Bad Credit?
You can get most loans even if you have a poor credit score. Should you? That’s a different story. Those with bad credit will almost always be given higher interest rates. This means you’ll end up paying more over the life of the loan than someone with a better credit score. Additionally, you may not be able to take out a large loan since your lower score may indicate poor borrowing habits in the past.
Any business owner with bad credit should ask themselves these questions before opting for financing:
- Can you handle potentially high monthly payments due to a high interest rate? With poorer credit, you may have interest rates in the 20% range, which can add a good chunk to your loan that you’ll need to pay off. Make sure this is something your business can handle.
- Could you get a co-signer with better credit to sign on to the loan with you? Co-signers should be family members or friends who have a good credit score that feels comfortable signing onto the loan with you. Their credit score can help you get a potentially better rate, but be aware that they are on the hook for payments if you fail to pay.
- Would leasing work better? Not all leases require a credit score, so those with poorer credit may want to consider this option before full-blown financing.
Where To Find Equipment Financing for Startups?
There are numerous lenders that offer equipment financing that will be especially helpful for startups. Whether you’re looking for large loans, no down payment, or flexible credit requirements, there are options for you. Here are just four to consider:
- Lendio offers a huge range of loan amounts between $5,000 - $5 million. You can take these loans out for anywhere between one and five years, and while interest rates through Lendio aren’t rock bottom, you may qualify for a rate as low as 7.5%.
- Credibly has potentially 24-hour turnaround times on their equipment financing, and you can apply online in about 10 minutes. If you don’t have a perfect score, Credibly may be for you, since they claim that about 90% of their applicants are at least pre-approved for financing.
- US Bank offers loan amounts up to $1 million, and they even let you finance multiple pieces of equipment with the same loan. Additionally, there’s no down payment required, and you’ll have terms between 24 – 60+ to choose from.
- National Financing has lower borrowing limits of $150,000 max, but they also offer leasing. You will need a credit score of 575 and you’ll have to have been in business for at least six months. But there’s almost no limitation to the equipment you can lease or finance.
When Is The Right Time To Use Equipment Financing?
Getting equipment financing is a process that business owners shouldn’t take lightly. Before getting pre-qualified for a loan, take a moment to think about if it’s the right move for your business. Equipment financing might be right for you when:
- You need it to run your business. Not all equipment is required right away to keep the business running. For equipment that is needed to make the product or service, this is worth financing since you’ll be out of business for a period without it.
- You have good credit. Good credit will get you the rate and terms you want when financing. Bad credit borrowers may want to explore other options before jumping to financing, but those with a positive credit history should consider financing.
- You want to direct cash elsewhere. If you need cash to direct towards the growth of your business, financing equipment can help you stretch payments over a longer period of time, leaving you with more cash to put back into your business.
Alternative Startup Funding Options You Could Try
Equipment financing isn’t always the best idea. When you don’t need a piece of equipment for a long period of time or your business can’t handle expensive monthly payments, financing could hurt your business more than it can help. Here are a few alternatives to consider:
- Leasing. Leasing equipment involves temporarily renting equipment from a lender. You likely won’t have to pay a down payment and monthly payments tend to be lower than if you finance equipment. The only downside here is that you won’t ever own the equipment, so you’ll be paying to lease it until you no longer need the equipment.
- Business credit cards. For smaller financing, business credit cards may come in handy. If you can get a card with 0% interest, you’ll have the length of the APR to pay off the purchase. Additionally, you’ll earn rewards on the purchase that you can use for business travel or needs.
- Business lines of credit. Business lines of credit are essentially a combination of a business loan and a business credit card. You’ll apply through a lender who can offer a line of credit that you can draw on at any time. This is more short-term financing, so only less pricey equipment should be financed this way.
- SBA loans. These loans are provided by the Small Business Associate and offer financing of major assets up to $5 million. Your business will need to meet some more rigorous qualifications, but these loans come with some more favorable terms.