What Is Equipment Financing?
Equipment financing refers to any business funding option (often a loan) used to make new equipment purchases.
Typically, it refers to equipment factoring, a type of business financing where the equipment purchase itself is used as collateral.
When your business depends on costly equipment for day-to-day operations, a broken machine can mean much more than the cost of replacing that piece of equipment.
It can mean that day (or week’s) sales, making an important customer’s order by the due date, or even payroll. Or something worse.
That’s where equipment financing comes in.
Below, you’ll learn more about each of the major equipment financing options available to you, how to qualify, and where to obtain it.
Get Fast Equipment Financing with Excel Capital
Equipment financing doesn’t have to be complicated.
Finding a lender you can trust that won’t bog you down in complicated applications, terms, and fine print is exactly what you don’t need.
If you need to replace a critical piece of equipment fast, let us help.
At Excel Capital, we’ve helped thousands of business just like yours get the capital they need to move forward:
Get the cash you need for new equipment– fast. Apply for equipment financing with Excel Capital:
3 Best Equipment Financing Options [Updated for 2024]
Any form of business funding can be used to purchase equipment. However, some are better suited for large equipment purchases than others.
You’ll find many options for equipment financing online, with many brands selling theirs as unique.
However, at the end of the day, equipment financing is typically done through one of these common financing tools:
1. Equipment Factoring
The most common form of equipment financing, with equipment factoring:
- You receive the cash to purchase the equipment you need
- And that equipment is used as collateral to secure the loan
That loan is then repaid with interest over 1-5 years.
Equipment factoring is best if you need to replace a vital piece of equipment fast and you don’t have great credit or collateral to put down to secure a loan.
Equipment factoring at a glance:
- Loan amount: Based on asset’s value
- Repayment terms: 1 – 5 years
- Minimum credit score: No minimum
- Additional minimum requirements: $100,000 annual revenue, 3 months in business
- Speed: Approval in 24-48 hours, funding in up to 1 week
Get the capital your business needs. Apply for equipment factoring with Excel Capital:
2. Term Loan
Term loans offer a lump sum of cash in exchange for repayment with interest over a specified period of time or “term”.
This type of equipment loan is one of the fastest funding methods available and the most like a traditional bank loan.
If you don’t like the idea of putting the newly purchased equipment down as collateral as in equipment factoring (or have other collateral you’d prefer to use) and you need something quick and easy, a term loan may be the option for you.
Term business loans at a glance:
- Loan amount: Varies, funding over $75,000 may require additional documentation
- Repayment terms: 2 – 5 years
- Minimum credit score: 680+
- Additional minimum requirements: $500,000 annual revenue, 2 years in business
- Speed: Approval in 24-48 hours, funding in as little as 72 hours
Apply for a term loan with Excel Capital today:
3. Business Line of Credit
A business line of credit is unique in that it offers an ongoing source of capital.
If you make large equipment purchases regularly, or have another need for funding, a business line of credit might be a more convenient source of funding.
You can use the capital for whatever your business needs, giving you more flexibility than equipment factoring offers.
Business lines of credit at a glance:
- Loan amount: $2,500 – 250,000
- Repayment terms: 6 – 12-month revolving
- Minimum credit score: 550
- Additional minimum requirements: $50,000 annual revenue, 1 year in business
- Speed: Approval in 30 minutes, funds instantly
Apply for an unsecured business line of credit with Excel Capital today:
How Does Equipment Financing Work?
Every lender needs some form of security to make sure they’re going to be repaid for the money they’re lending. This is most commonly known as collateral.
With traditional bank loans, the loan is “secured” through some form of hard collateral such as property, cash, or a vehicle.
This means that if you can’t pay back the loan amount, the lender will collect the collateral to settle the debt.
In this way, equipment financing is unique.
With it, the new piece of equipment itself that you purchase with the loan serves as the collateral for the loan with a simple UCC filing on the business collateralizing the equipment being leased or financed.
So, you’re not required to put up any kind of additional collateral to be approved for equipment financing.
Similarly, the amount of money you’re approved to borrow is exactly based on the value of that new piece of equipment.
Equipment Financing vs. Equipment Leasing: What’s the Difference?
Similar to equipment financing, equipment leasing is another option to consider which works similarly.
The difference really comes down to whether you need a short-term or long-term (or permanent) solution.
You own the equipment through equipment financing and work to pay off the loan itself. But with equipment leasing, you only have the equipment for as long as you’re paying for it.
And, if it’s a critical piece of equipment you need to use every day for your operations, you may very well continue to pay monthly well passed the value of the equipment, meaning you’re paying more than you should have.
Equipment Financing: Pros and Cons
With equipment financing’s unique niche among small business financing options, it comes with its own set of unique pros and cons.
There are several benefits to equipment financing. However, there are also some cons you should be aware of, so it might not be the ideal financing option for you.
Here are the pros and cons of equipment financing:
Pros
- It’s fast: With equipment financing, you can be approved and funded within as little as 3 business days.
- Flexible payment plans: Equipment financing offers some of the most flexible repayment terms of any financing method.
- No additional collateral: With equipment financing, the equipment you purchase with the loan is the collateral, so there’s no need to put down any precious collateral such as property or cash savings as secured bank loans require.
- Minimal paperwork: Because of the nature of equipment financing, less is required for approval.
- Tax-deductible: The equipment you purchase (and the interest you pay!) is tax-deductible, so you can write it off at the end of the year.
Cons
- The equipment could be obsolete by the time you pay it off: Chances are, if you’re investing in equipment now, you can gauge its value to your business in the long-term. However, things may change, so it’s important to know that piece of equipment has a value equivalent to how long it takes for you to pay off its cost.
What documents are needed for approval?
In addition to the above qualification factors, you’ll need a few important documents for approval.
These are used by the lender to obtain an accurate assessment of the health of your business as a whole.
The documents you’ll need include:
- Business bank and credit card statements (number of months may vary)
- Profit and loss statement and balance sheets
- Completed application
- Other paperwork may be requested after submitting an application
Alternative lenders, who offer equipment financing, generally want to obtain a complete view of the financial health of your company.
As opposed to traditional bank loans, with equipment financing, it’s about more than just your credit score. Though credit does carry weight as well, so keep that in mind.
And once you’ve applied for financing and been approved, your interest rate will depend upon:
- The value of the equipment
- Your credit and business history, and
- The value of the loan and repayment terms on the equipment’s value
Vehicle (Truck and Semi-Trailer) Financing vs. Equipment Financing
It’s important to point out that financing a vehicle for business, such as a truck or semi-trailer, is somewhat different from financing any other piece of work equipment.
Most traditional equipment financers won’t finance anything with wheels, which includes skid steers and tractor trailers. And, if they do, they typically require a down payment of at least 20% and have a higher reliance on credit to.
The reason for this is three-fold:
- Vehicles depreciate faster than other types of equipment
- They can be stolen or damaged in an accident
- They’re mobile, therefore more easily lost or taken (someone can’t drive off with a piece of heavy equipment the same way you can a truck)
These points combined mean it can be more difficult for a lender to recover in the case of default, so they need to maintain stricter qualification factors to make up for it.
Keep that in mind if you’re considering financing a new vehicle for business purposes.
How Much Does Equipment Financing Cost?
How much equipment financing will cost you all depends on the lender, as they will have somewhat varying terms.
However, the general idea is the same:
- You pay off the loan in regular (usually monthly) installments on a repayment term of 1-5 years based on the value of the equipment
- You pay interest APR typically in the range of 8-30% per year based on the value of the equipment and you and your business’s financial health
- You can deduct the value of the equipment and the interest you pay on your taxes
It’s important to understand that with equipment financing, you will be paying more than the value of the equipment over the life of the loan.
That’s the trade-off for obtaining the cash you need to purchase the equipment now instead of losing out on the revenue that the equipment helps you obtain.
Equipment Financing: Example
For clarity sake, let’s go over an example so you understand exactly how equipment financing might work for you.
Jen owns a small retail clothing company called Jen’s Threads that makes its own items in-house.
One of Jen’s specialty sewing machines worth several thousand dollars has broken. She needs to repair it quickly or risk a major slowdown on her production line that will cost both time and money.
And, let’s say that machine costs $5,000.
If her repayment term is 2 years, APR is 10%, and payment monthly, she’ll pay $230.72 each month until the loan is fully paid off.
Over the course of that time, her total interest cost will be $537.39. That brings her grand total– the total amount of money she pays for that piece of equipment– to $5,537.39.
That $537.39 represents the extra amount she had to pay in exchange for the convenience of being able to obtain the money for that critical piece of equipment upfront.
Ultimately, you’ll have to judge if obtaining that equipment quickly is worth the interest cost for you in your own situation.
However, in many cases, waiting to save the money for that piece of equipment– especially if it’s of high importance– will cost you that much or much more.
So, it’s important to consider what you’re gaining and losing by taking both routes and make the choice you believe is best for your business long-term.
Discover the Best Equipment Financing Options for You with Excel Capital
Equipment financing offers a unique funding solution if you’re in need of replacing a critical piece of equipment fast.
With several pros and few cons, if an important piece of equipment has recently broken or become old and less reliable, financing may be the perfect option to get you back up to speed fast.
Complete our short, one-page application to see how much you can be approved for today: