Equipment Financing: What is It and When can Small Businesses Use It

Every business has a tool of its trade, equipment it simply cannot be without to provide its goods or services. Business equipment can be expensive and many cash-strapped small businesses and startups simply don’t have the money to purchase the tools of their trade or to upgrade old and malfunctioning equipment, so they remain competitive.

Equipment financing is the term used to describe loans provided for businesses to purchase the equipment they require for business operations and growth. By giving a business the finance to buy a piece of equipment, this type of lending can help improve a business’s working capital.

What Can Equipment Finance Be Used For?

Equipment financing is one of the most common reasons small businesses seek external financing. The funds provided to a small business can be used to purchase the equipment the business requires to operate. Such equipment can range from expensive machinery for farming, to office furniture, PCs and IT infrastructure.

Equipment financing can be used for anything from any type of business. For example, a mobile hairdresser may need to borrow money from an equipment financer to purchase essential hairdressing tools like scissors, razors and colorants. Or a construction business may require finance to purchase major equipment such as excavators, bulldozers and drilling machines.

Some of the most common purchases used by equipment financing include farm equipment, company vehicles, healthcare equipment, commercial computers, printers and servers, restaurant equipment, manufacturing equipment, and larger construction vehicles and equipment.

Equipment Financing for Equipment Upgrades

According to a survey by small business lenders Fundera, a staggering 42% of small business owners say they need to secure finance to purchase equipment. All equipment has a shelf line, and equipment upgrades are a major ongoing expense for small business.

The amount of non-bank lenders providing the necessary finance for small businesses to enable them to upgrade equipment is on the rise. A report in the Wall Street Journal in 2015, revealed the small business lending by the ten largest banks in the United States was down 38% from its peak in 2006.

A growing number of non-bank lenders are supplying small businesses with vital equipment financing. Innovative tools and platforms are being launched, designed to simplify equipment financing processes and help small businesses get the best deals to purchase vital equipment.

One such company is EquipmentWallet, which promises to make it easier for small businesses to apply for equipment financing through a bid-and-quote process.

Businesses simply complete a short questionnaire and EquipmentWallet reviews the options and bids from matched lenders and then select the best lender quote to secure equipment financing.

What Are the Stipulations of Equipment Financing?

There are certain stipulations involving equipment financing. For example, many lenders only agree to fund around 80 – 90% of the cost of the equipment, leaving the business to cover the remaining 10 to 20%.

With an equipment loan, the lender is typically secured by the equipment, so that if the small business can no longer afford to make the loan repayments, the equipment may be collected as collateral.

Are There Any Downsides to Equipment Financing?

Borrowing money to purchase hard business assets can be essential for many small businesses which would struggle to make outright equipment purchases. However, it is important small businesses are aware that entering an equipment financing agreement will end up costing them more than purchasing equipment outright, as they will pay interest and fees on the loan.

Interest rates are typically between 6 to 9% and arrangement fees can be around 4%. The usual term for equipment financing is between two and seven years.

Equipment financing can be quicker to qualify for than other business loans and traditional business financing. This type of financing can be extremely useful for small businesses of all industries needing to make vital equipment purchases and upgrades.

Photo via Shutterstock

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