Equipment Financing

How Equipment Financing Works

Equipment financing is a type of asset-based lending that helps business owners get the funding to purchase or lease equipment without depleting their working capital. Credit approval is more flexible with this type of commercial banking because the equipment is used as collateral to secure the financing. So instead of primarily basing approval on the business owner’s credit score, lenders place more emphasis on the value of the equipment itself.

What Kind of Equipment Can I Finance?

Getting an equipment lease or financing can help you fund a variety of business needs. This financing solution can be used for things like: 

• Vehicles
• Heavy machinery
• Restaurant appliances
• Medical equipment
• Office furniture
• Technology systems

Regardless of your company’s industry expertise, exploring your equipment finance options could help the success of your business. Plus, unlike a personal loan, you won’t always be held personally responsible for repaying the loan, depending on the lender. Unless there’s a personal guarantee required, equipment financing is just tied to the company and uses the asset as collateral.

Equipment Financing vs. Equipment Leasing

There are two types of equipment financing: equipment leasing or getting funding or financing for equipment. With equipment leasing, you pay a monthly rental fee for a set period of time. When the lease term is over, you have up to three choices:

• Return the equipment
• Renew the lease
• Purchase the equipment

Equipment financing is a type of funding that gives you full ownership of the equipment. You’ll pay interest in addition to the principal balance, usually as a fixed monthly payment. But once your financing  term is over, you own the equipment free and clear. Choosing the best equipment financing option depends on the type of equipment you need, how long you expect to need it, and how frequently you plan to update those assets. You can also use an equipment loan calculator to help you compare costs.

Pros and Cons of Equipment Financing 

One of the biggest advantages of equipment financing is that it helps you grow your business with new equipment while spreading out the costs over time. Additionally, you don’t need any collateral besides the asset itself. By integrating new equipment into your business, you could increase revenue and reach with your services. 

A drawback is that funds can only be used for equipment and sometimes soft costs associated with the purchase, such as taxes or delivery fees. Other types of financing, such as a small business loan or business line of credit, have minimal restrictions on how you use the funding proceeds. Additionally, rates may be higher compared to other types of financing. 

Pros of equipment financing

• Scale your business
• Spread out large capital costs
• No additional collateral needed

Cons of equipment financing

• Use restricted to equipment
• May have higher interest rates

Requirements for equipment financing

To get equipment financing, you’ll typically need to meet the following requirements:

• At least 12 months in business
• $50,000 or more in annual revenue
• Credit score of 650 or higher

If your credit score is lower than 650 but you can show proof of solid cash flow and revenues for the past 3 to 6 months, you could still qualify.

And don’t worry if you don’t meet all of these requirements. Exact qualifications vary by lender and equipment type. The best way to figure out what you qualify for is to fill out our free 15-minute application or get in touch with one of our personal funding managers at (855) 853-6548.

No down payment or collateral? No problem. One of the big benefits of equipment financing is that your equipment can also act as your collateral, which means you can secure financing without draining the last of your liquid cash or risking your personal assets. 

Your lender will determine how much you can finance by reviewing the type of equipment you’re buying, its lifetime value, and whether it’s new or used. 

Because the collateral is literally part of your financing, it’s often not as difficult to get approved as many small business owners think it is. Getting started is easier than following those Ikea instructions: just fill out our application, then compare equipment financing options from our nationwide network of 75+ lenders.

How much does equipment financing cost?

Your equipment financing payments are determined by four things: 

• Funded amount
• Interest rate
• Term
• Collateral

These factors can vary widely across industries and equipment types. That’s why we work with a variety of lenders who specialize in industry-specific small business loans, so we can help you find the best deal.

If math isn’t your thing, you can use our equipment financing calculator to figure out what kind of monthly payments you can afford. 

Also consider both the short-term and long-term gains your new equipment will yield. To determine whether equipment financing is getting you some real bang for your buck in the short term, you should weigh the costs of your monthly payment against the benefits your new equipment will bring. 

Here’s an example: if the 3-D printing equipment you’re financing costs you $600 in monthly payments but enables you to take on an extra $2,300 in monthly orders, then your cash flow increase considerably outweighs your costs and makes the financing worthwhile.

This same concept applies to the man-hours you’ll save by leveraging a software purchase to automate several hours of invoicing and payment processing, or being able to attract new business because your upgraded sorting equipment lets you offer significantly faster shipping times than your competitors.

To figure out whether you’ll also see a hearty long-term return on investment, consider the longevity of the equipment you’re financing. Equipment that only gives your business a minor lift and may be obsolete in a few years when you pay off your financed amount may not give you the long-term leg up that you’re looking for, whereas receiving a funded amount over a 4-year term on equipment that will last for several years beyond that could be a much better investment.

Frequently Asked Questions

Is it hard to get financed for equipment?

Qualifying for equipment financing can actually be easier than SBA loans or other business financing options because the lender uses the equipment as collateral. 

How do you finance new equipment?

Lendio makes it easy to get approved for equipment financing. Start by filling out a 15-minute application form after which you’ll connect with your funding expert to wrap up your application. Then you’ll start receiving offers and can connect with your funding expert to evaluate your offers before deciding on the best choice. 

How long is an equipment loan?

It depends on your lender and funding/financing terms. However, most equipment finance terms range between 3 and 10 years in length. 

Why is equipment financing important?

Equipment financing helps you scale your business without depleting your cash reserves. Plus, the eligibility requirements are easier to qualify for since there’s physical collateral attached to the funding.