When to consider an equipment loan

Many businesses rely on equipment to enhance productivity and expand operations. Whether it's machinery, semi-trucks, medical devices, computers or other supplies, the right equipment can cost thousands that some businesses don't have to spend upfront.

An equipment loan allows businesses to purchase and pay for equipment over time, making it an essential tool in achieving operational goals. But with so many financing options available, knowing when an equipment loan is a good idea is important. To help you decide whether an equipment loan is right for your business, here is when you should consider an equipment loan.

New business owners often have limited capital to work with. As a result, it is common to cover various expenses with a loan, including the purchase of equipment.

It can be a challenge to get approved for a business loan as a startup. But since equipment secures the equipment loan, lenders may be more flexible with their lending requirements, especially when it comes to a business's credit score and annual revenue.

Purchasing equipment is necessary for businesses operating in certain industries if they are looking to expand and increase profits. For example, businesses in the transportation, restaurant and medical industries must purchase various pieces of equipment to get up and running and stay in operation, meaning they would likely benefit from an equipment loan.

The amount of an equipment loan is typically based on the equipment's cost, which varies from anywhere between $500 and $500,000 for one piece of equipment. For example, with semi-truck financing, businesses can expect to spend between $70,000 and $200,000 on a new semi-truck.

Although a business could spend thousands in the long run, equipment loans make it possible to purchase the equipment they need and pay for it over time rather than paying the full cost upfront. Ultimately, this makes it easier to manage the cost of the equipment.

If you purchase equipment to improve your business's productivity, you want it to be high-quality equipment that's durable, efficient and reliable. Of course, you’ll have to pay for maintenance and repairs out of pocket, but as an owner, you have full control, allowing you to promptly address any issues and ensure the equipment's optimal performance.

However, with equipment leasing, the leasing company is in control, which can potentially cause delays that can negatively impact your business.

When paying for equipment upfront, you risk reducing or limiting your business's cash flow. An equipment loan preserves the working capital needed to handle day-to-day expenses while making manageable monthly payments. Ideally, knowing and anticipating the regular costs ensures you can create a more accurate budget.

When seeking an equipment loan, there are several avenues to explore based on your business needs.

Small Business Administration (SBA): SBA loans provide favorable terms and low-interest rates for small businesses interested in purchasing equipment.

Banks and credit unions: Equipment loans from banks and credit unions have some of the strictest lending requirements, but business owners may be able to leverage their established relationships to get approved for funding and competitive rates.

Alternative lenders: Alternative lenders typically operate online and tend to have less stringent requirements and faster approval processes, which can be especially appealing to subprime borrowers with limited options.

An equipment loan can allow your business to acquire an asset essential to its operation. Still, it's important to consider both the pros and cons of equipment financing when deciding if it's the right funding choice and selecting the best equipment loan for your business.

Pros

Cons

Improve or build business credit

Can only be used on the purchase of equipment

Break cost down into manageable monthly payments

Down payment may be required

Additional collateral isn't required

Equipment may not last as long as loan term

Loan can be funded quickly

Potentially high interest rates and fees

If an equipment loan doesn't feel like the right choice, there are a few alternatives that may be worth exploring.

Term loan: Business term loans are a common financing option that provides a lump sum of money. Term loans are repaid over a set repayment period with fixed interest rates, but the funds can often be used for more than equipment purchases.

Line of credit: A business line of credit offers flexible funding where businesses can access a predetermined credit limit as needed, only paying interest on the amount borrowed. It's an ideal fit for managing fluctuations in cash flow, covering short-term expenses and seizing opportunities without the need for a traditional loan application process. But, if you choose an equipment line of credit, you are restricted to using the line of credit for equipment purchases.

Leasing: Leasing equipment allows businesses to use equipment without the upfront cost of purchasing. While this means lower initial expenses, there may be lease restrictions, and you don't own the equipment when the lease expires. However, depending on the type of lease, you may be presented with the opportunity to purchase the equipment once the term ends.

Business credit card: Business credit cards often have lower limits than loans, so if the cost of your equipment isn't high, a business credit card is an option that offers convenience and flexibility. You may also earn rewards or cashback on the purchase or have an introductory interest rate. That said, if you carry a monthly balance, you will be subject to the card's APR — which could be higher than a traditional loan.

If your goal is to invest in your business's future success, equipment loans allow businesses to acquire the equipment needed to enhance productivity and efficiency, ultimately driving growth. However, when choosing an equipment loan, it's crucial to carefully evaluate loan terms and assess your ability to meet repayment obligations to ensure you maintain financial stability while covering the monthly payments for the equipment.