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How to Get Equipment Financing and Equipment Loans: Everything Your Need to Know

By John Csiszar

Equipment financing is an essential step in the growth of most businesses. Unless you are a completely online service company, you’re likely going to need to finance equipment as a regular part of doing business — and even if you are an online service company, you’ll still need access to cash so you can finance equipment like computers.

Equipment financing lets you borrow up to 100 percent of the value of your equipment so that you can operate your business and generate revenue. Since most businesses need equipment to earn money, the cost to purchase can be paid back to you many times over. However, the amount you pay for financing is always subject to negotiation. The more you pay out of pocket to finance your equipment, the less profit you’ll make from the use of that equipment.

When it comes to getting the best equipment finance rates, think of things from the perspective of the lender. Who would you rather lend money to — a borrower with top-notch credit that has a history of paying back loans on time, or a company with bad credit that has defaulted on prior loans? Obviously, the safer bet is the company with the better credit history. In this light, you should always strive to get your credit in the best shape possible; the less risk a lender sees in your credit history, the more likely you are to get a lower interest rate on your loan.

The good news is that lending is a competitive business by nature. There are many banks and finance companies out there looking to earn your business, so you’ll likely have various options to choose from, even if you are a startup or have bad credit. The key is to find a lender that is easy to work with, that understands your small business needs and that can get you financing at the best possible rate.

Here’s a look at the types of loans and interest rates that seven types of borrowers can expect to find when looking for equipment financing.

Compare The Best Equipment Financing Loan Options

Type of Borrower Funding Source Funding Type Loan Amount Fees May Include Rates Down Payment Terms Take Action
0% Down $1 Buyout Lease Lease Up to FMV of equipment Application fee, origination fee ,prepayment fees 7-10% 0% Variable typically up to the useful life of the equipment
Fair Credit Term Loans Loan Up to FMV of equipment Application fee, origination fee, late payment fee 5% - 20% 5% - 25% Variable typically up to the useful life of the equipment
Good to Excellent Credit Fair Market Value Lease Lease Amount of expected depreciation over life of lease Application fee, origination fee, late payment fee 3% - 7% 0-10% 1-3 years
Bad Credit Structured Loan Loan Variable typically up to $100,000 Application fee, origination fee, late payment fee 8% - 25% 10-25% 1-3 years
Startups Alternative Lender Specializing in Startups Variable Up to $500,000 Typically none 0% intro APR for several months; varies thereafter 0-25% 1-5 years
Companies With 2-3 Years of Financials SBA Loans Loan Commonly, $50,000 - $100,000; up to $5 million Packaging fee, guaranty fee Prime + 2.25% or prime + 2.75%; smaller loans may be 1% to 2% higher 5-20% Up to 25 years for real estate; typically 5-10 years for equipment, up to the equipment’s useful life
Businesses With 5+ Years of Consistent Revenue Line of credit Line of Credit Up to $5 million+ Application fee, origination fee, maintenance fee, over-the-limit fee, late payment fee Variable; some lenders use Prime + 1.75% N/A As-needed; when drawn, typically 1-3 years

Top 7 Options for Equipment Financing

1. $0 Down

How to Get Equipment Financing With $0 Down

For many companies, leasing or buying equipment with $0 down is a dream come true. With $0 down, you don’t have to give up any of your precious capital reserves to pay for equipment, and you can take possession of it immediately. Depending on the type of equipment, this means that you can start generating revenue immediately for your business before you have to pay out any meaningful capital. One of the ways to finance equipment with a $0 down payment is to use a $1 buyout lease, which is very similar to a traditional loan but has some different accounting ramifications.

  • How Does It Work?

  • What Are the Rates?

  • Am I Eligible?

  • How Much Can I Get?

  • What Documents Do I Need?

  • What Are the Terms?

From an operating capital perspective, you can think of a $1 buyout lease like a loan. A typical $1 buyout lease has fixed payments over a specified term. For your final payment, you’ll pay $1 in exchange for ownership of the equipment outright. Unlike with a loan, you can transfer the asset you’re financing to your balance sheet immediately, which could qualify you for depreciation and interest expenses, reducing your effective cost. This can be a priority in the accounting departments of certain companies.

Generally, you’ll want to use a $1 buyout lease on equipment that will hold its value over time. If you are financing equipment that rapidly loses its value, you won’t want to own it at the end of the fixed financing term, even for $1. For example, if you’re financing equipment with a useful life of three years, you won’t want to sign a five-year $1 buyout lease, as the equipment will be technically worthless by the time you buy it. Heavy equipment, for example, will likely continue to generate revenue for long after the time a $1 buyout lease matures, so it’s a good candidate for this type of financing.

No matter what type of equipment financing you seek, your rate will vary based on the lender’s perception of your risk. The more likely you are to make your payments, the more likely you’ll get a decent financing rate. This means that large businesses with years of growing revenue and profits will always be able to obtain better financing than newer companies or individuals with sketchy credit histories. However, financing of some type is almost always available to companies, particularly for collateralized loans — you’ll just have to keep your eye on the rate you’re offered.

For the average $1 buyout lease financing, you can probably find rates in the 7 percent to 10 percent range. The better your personal credit and the stronger your business financials, the more likely you’ll find rates towards the lower end of that range.

Equipment loans can be easier to qualify for than unsecured loans because the value of your equipment acts as collateral for your loan. However, if you’re looking to put $0 down, you’re making the loan a riskier proposition for the lender. imagine if you were to finance a $100,000 piece of equipment with $0 down and then fail to make payments starting three months later. Yes, the lender can repossess the property to help pay off the loan, but it will likely lose money on the deal. Your equipment will now be used and will have depreciated, and with $0 down, all the lender has to show for it is three monthly payments. That’s a losing scenario for any lender.

To help offset that risk, you might need better credit or a more robust business to qualify for $0 down financing or a $1 buyout lease. If you have a proven track record of paying back your loans in a timely fashion, that will go a long way. So will years of consistent revenue and/or profit in your business — but this isn’t always an option for newer or startup businesses.

The bottom line is you’re more likely to be approved for $0 down financing if you’ve been operating for a number of years. Startups might have better luck choosing a different form of financing.

The size of your $0 down loan will be commensurate with the value of the asset you’re financing. Since a $1 buyout lease is essentially the same as a purchase loan, in terms of the payments you’ll make, you should expect to pay the full value of the equipment over the life of the loan, plus interest. Of course, all loans are contingent to at least some degree on your credit profile and the cash flow and operating history of your business. Since your $1 buyout lease will be collateralized by your equipment, however, you can often get 100 percent financing.

Documentation requirements for all types of equipment loans are fairly standard. Since your new equipment is going to act as collateral for the loan, you generally won’t need as much documentation or proof of payback capability as with a general unsecured loan. However, finance is still finance, and the more evidence you can show that proves your ability to make the lender whole, the more likely you are to get approved, and at a better rate.

At the very least, you should expect to provide this type of basic documentation:

  • Information about the equipment, such as an invoice or purchase agreement
  • Personal identifying and financial information, such as your Social Security number
  • Business bank statements, from a few months to few years depending on the lender

In some cases, you might be asked for additional information, such as an operator’s license, business permits or proof of insurance.

The bottom line is that you should be willing to provide any evidence that shows you’re a good credit risk and that the lender is likely to get paid in whole and on time.

Terms for a $1 buyout lease are much like a traditional loan. This means that your terms can likely be fairly flexible, depending on your credit qualifications and your choice of lender. The type of equipment you’re financing will also play a role in determining your terms. For example, you might be able to finance heavy equipment with a 20-year life for a longer term than you would for shorter-term equipment. Of course, the longer the term length you choose, the more interest you will pay over the life of the lease/loan. Since all of these factors are highly variable, rates can range from about 6 percent to 15 percent or more for a $1 buyout lease.

2. Fair Credit

How to Get Equipment Financing With Fair Credit

With fair credit, you’ll have access to certain loans, but you could be denied for others. You can expect to pay a higher interest rate than those with higher credit or a longer operating history when you take out any type of loan. A standard term loan can be a good option if you have fair credit because you might not qualify for a standard lease, which generally requires a higher credit score.

  • How Does It Work?

  • What Are the Rates?

  • Am I Eligible?

  • How Much Can I Get?

  • What Documents Do I Need?

  • What Are the Terms?

A term loan has the traditional loan format that most people are accustomed to, in which you make fixed payments over a set term until your loan is paid in full. For equipment loans, you’ll want to make sure that the term of your loan is shorter than — or least not in excess of — the useful life of the equipment you’re financing. Otherwise, you’ll still be making payments on equipment that may no longer be generating revenue for you, which is a losing proposition.

With fair credit, you won’t get the best rates available for equipment financing, but you should be able to get financed at a rate that won’t kill your business. Rates can vary dramatically based on the lender you choose and the specifics of your business, but they’ll generally fall in the range of 5 percent to 20 percent. Bear in mind that to get a loan anywhere near the low end of the range you’ll have to provide substantial collateral — often in addition to the equipment you’re financing — along with various other evidence that you can repay your loan.

Just like a $1 buyout lease, a traditional term loan might be easier to qualify for because you’ll be using the equipment you’re financing as collateral. If you have bad credit, you may not qualify for any term loans at all, but with fair credit, you’re likely to get at least a few offers. However, since you’re at the lower end of the credit scale, you can expect to pay higher interest rates on your loan, and your term may be shorter as well.

You can think of a term loan for equipment financing like a car loan. You can generally finance up to the full amount of your equipment’s value, although your lender is likely to require a down payment. A down payment might actually be in your own best interest, as just like a car loan, your equipment is going to depreciate as soon as you take possession. If you need to sell your equipment for whatever reason before you pay it off, you might be underwater on your term loan and owe more money than you can get out of the sale.

Documentation requirements for all types of equipment loans, including term loans, are fairly standard. Since you’ll have collateral in the form of new equipment, you won’t need to demonstrate the payback capability you would need with an unsecured loan. With fair credit, however, you’ll want to do your best to come up with documentation proving you’re not a default risk if you want to get approved at a decent rate.

When you apply for equipment financing, you’ll need to provide this basic documentation at the very least:

  • Invoices or purchase agreements for your new equipment
  • Your Social Security and other personal identifying and financial information
  • Business bank statements for at least a few months and perhaps as much as a few years

Depending on your business and the type of equipment you’re financing, you may also have to provide an operator’s license, proof of insurance or business permits.

Your fair credit score may keep you from working with the biggest and best-known lenders, so you’ll have to do your homework to ensure that you’re working with a reliable lender that can work with you.

Terms for equipment loans are generally short- to mid-term in length. Lenders won’t want to extend you a loan that lasts beyond the useful life of your equipment, as in the event of default they won’t have an asset of any value that they can repossess. Also, the longer the term of the loan, the more risk the lender takes on, as the equipment may fail or become less efficient in terms of generating revenue for your business, thus straining your cash flow. Generally, you can expect to get a term loan for equipment in the one to five-year range. The better your credit, the more likely you are to be extended a longer loan.

3. Good to Excellent Credit

How to Get Equipment Financing With Good to Excellent Credit

If you’ve got good-to-excellent credit, you’re sitting in the catbird seat when it comes to getting equipment financing. You’re likely to have a number of lenders fighting for your business, all you’ll have access to the lowest interest rates available. With this type of credit profile, a fair market value lease may often be your best option when it comes to equipment financing.

  • How Does It Work?

  • What Are the Rates?

  • Am I Eligible?

  • How Much Can I Get?

  • What Documents Do I Need?

  • What Are the Terms?

A fair market value equipment lease is somewhat akin to a car lease; you’ll make regular monthly payments and then have the option to buy the equipment at the end of the term. Fair market value leases are good options when you’re financing equipment that you don’t want to own at the end of the term, perhaps because it has a limited useful life. For example, if you need IT equipment or computers for your business, you might find that the technology is outdated in three-to-five years, or perhaps even sooner. In this case, a fair market value lease may be a good option, as you can finance newer equipment when your lease term expires.

With good-to-excellent credit and a collateralized lease, you can generally get pretty low rates. Depending on the package you present to your lender — and your lender’s own flexibility — you may be able to get a lease rate in the range of 3 percent to 7 percent.

Generally, you’ll need at least a good credit score to qualify for a fair market value lease. Part of the reason for this is that you’re unlikely to put much of a down payment on your lease, perhaps as little as $0. Even with a small down payment, your equipment is likely to depreciate faster than the amount the finance company recoups in the first few months of your lease term, so if you can’t make your payments, your lender will be on the hook. Having a good credit history can help alleviate those risks and make it more likely that you’ll be approved for your lease.

With a lease, you’re usually only paying the amount of the depreciation of your equipment over the lease term. This means that your lease will generally be for less than the cost of your equipment. Of course, in some cases you may end up paying near full price for the equipment anyway, such as if you get a three-year lease on equipment with a three-year useful life. For the most part, however, you’ll only get a lease for 50-85 percent of the value of your equipment, with an option to buy it outright for the remaining fair market value at the end of the lease.

With a fair market value lease, your finance company retains title of the equipment for the life of the lease. If you can’t make your payments, your lender will simply keep (or liquidate) your equipment. However, you’ll still need to qualify for a lease just like you would for a traditional loan, and you’ll generally need better credit to get one.

When applying for a lease, think of it the same was as if you were taking out a loan. The better your credit profile, the more likely you are able to qualify for a lease, and with better interest rates. To that end, you’ll need to provide these documents to your potential lenders, at the very least:

  • The type and price of your equipment, including an invoice or purchase agreement if you have one
  • Your Social Security number so the lender can run a credit check
  • Bank statements showing the cash flow and profitability of your business

You’ll often be required to provide additional information, which may include but not be limited to business permits, licenses or proof of insurance.

If you’ve got good-to-excellent credit, you shouldn’t worry about qualifying for a lease. However, finance is a competitive business, so don’t be afraid to shop around to different lenders. Your top-tier credit is a bargaining chip you can use to negotiate the best rates available from various lenders.

Lease terms can be flexible and are usually tailored to the type of equipment you’re financing. Commonly, business equipment leases are in the one-to-three year range, although some equipment can be leased for five years or even more. You’ll generally have fixed payments over the life of your lease, with the option to buy the equipment at fair market value upon lease termination.

4. Bad Credit

How to Get Equipment Financing With Bad Credit

If you’ve got bad credit, you might struggle to get affordable equipment financing for your business. With bad credit, many lenders will see you as an unacceptable risk, and you might have to turn to forms of alternative financing. In many cases, a structured loan is one of the best options for a bad credit borrower.

  • How Does It Work?

  • What Are the Rates?

  • Am I Eligible?

  • How Much Can I Get?

  • What Documents Do I Need?

  • What Are the Terms?

A structured loan is somewhat akin to a personal arrangement between a lender and a borrower. Structured loans take into account the fact that newer companies, or those with bad credit, might have uncertain and irregular cash flows. Thus, a structured loan can be built around payments that only have to be made when a business is cash-flow rich. Obviously, this is a risky proposition for lenders, but so is offering a traditional loan to companies with bad credit; with irregular cash flows, it can be difficult to impossible to make regular monthly payments, making default more likely. With a structured loan, payments can be made when companies receive their own payments from customers.

A structured loan is high-risk for lenders, so there’s always a higher interest rate attached to them. Rates will fall into a broad range for a structured loan, so you can expect to pay anywhere between 8 percent and 25 percent, generally speaking. At the higher end of this range, you may have to assess if a structured loan is an option that your company can afford to take on. However, with some good negotiation, you may be able to get a rate in the single digits.

Eligibility for a structured loan can be tough. Although they can be tailored to meet the needs of customers with bad credit, the fact that you have bad credit makes you a risky customer for banks. You’ll have a better chance of qualifying if you can demonstrate that you do have cash flow coming into your business, even if you’ve had trouble paying your bills in the past.

A structured loan is flexible, so the amount you can get is similarly variable. However, you should expect to receive financing equal to the full value of your equipment less the amount of your down payment. This may be payable at various times or as a balloon payment at the end of your financing term. The specific loan terms are contingent on the deal you work out with your lender, based to a large degree on your credit profile and the cash flow of your business. With bad credit, however, you might not be able to finance the full amount high-priced equipment, in which case you’d have to seek out an additional source of financing.

Even though your credit history might not show a flattering picture, you’ll still need to provide it to your potential lenders. Although you can’t whitewash a derogatory profile, do all you can to present your credit in the best possible light. If you have a bankruptcy on your report due to medical bills but you always paid all of your other bills on time, for example, be sure to emphasize that when you provide your information to lenders. Any mitigating factors that can reduce the impact of your bad credit history should be highlighted. For better or worse, you’ll also need to provide information about the cash flow and profitability of your business, along with information about the equipment you intend to finance. If you expect your new equipment to begin generating additional revenue immediately, be sure to show your business plan to your lenders so they can see that you’ll be able to pay them back.

Terms of a structured loan are by definition flexible. You may be able to delay the bulk of payments to a date in the future when you anticipate generating a chunk of revenue, paying off your loan in a balloon payment. If you have irregular cash flow, your lender may allow you to make payments when you receive your income. Since a structured loan doesn’t follow any traditional loan template, you’ll have to hammer out an agreement with your lender that is amenable to both sides.

5. Startups

How to Get Equipment Financing With Startups

Startup financing is usually in its own category, as new businesses don’t have as much access to the credit markets as more established ones. Even with a great business idea, banks are in the business of risk and reward. It’s obviously safer for a lender to work with a company that has years of predictable cash flow than one with a great idea but no revenue to show for it yet. Of course, lenders also realize that companies need equipment to generate revenue, and that equipment usually needs to be financed. Since major banks are usually out of the question, as a startup you should consider alternative lending options that specialize in helping newer companies, like Seek Business Capital.

  • How Does It Work?

  • What Are the Rates?

  • Am I Eligible?

  • How Much Can I Get?

  • What Documents Do I Need?

  • What Are the Terms?

Online lenders and business consultants such as Seek Capital exist to provide quick financing options to newer companies, including startups, which typically don’t qualify for SBA loans or bank loans. Online lending companies and alternative lenders allow you to apply for funding within a matter of minutes and get a response in as little as a few hours. If you need a more specialized type of financing, as you may if you are just starting out and looking to finance new equipment, you can talk to a representative to figure out which route is best for your new business.

Rates can be higher for startup companies simply because they don’t have an operating history or much of a business credit history. However, financial companies specializing in helping startups understand that if a newer company is burdened with too high of an interest rate, the loan may fail, which is a lose-lose proposition. Thus, options like Seek Capital can usually work with newer companies to arrive at a rate that compensates the lender for the risk involved while still affording the company the chance to thrive. For many startups, Seek Capital can offer a 0% introductory APR, with a variable rate thereafter.

If you’re a brand-new company, by definition you don’t have the financial history that makes someone eligible for a traditional bank loan. Before you begin the financing process, make sure that your business plan is thorough and complete. This document will not only help guide the growth of your business but also may be an important key in the puzzle to qualifying you for your equipment loan. You’ll need some black-and-white figures to prove to loan officers that you can afford to pay back the money you borrow.

Once you’ve nailed down your operating strategy, get your finances and credit in order. Without a business history, your personal credit score and history will typically take center stage. Try to keep your debt balances low, make all of your payments in a timely fashion and prevent yourself from becoming overextended financially.

Alternative lenders like Seek Business Capital understand the financial difficulties of startup companies and may be more flexible about your financial situation, which can improve your chances of getting approved.

If you’re just looking for a general loan for your startup business, you may be able to get a much larger loan than with an equipment-specific loan. At Seek Business Capital, financing requests of up to $500,000 may be approved, if you’re a qualified borrower. However, it’s typically easier to get approved for smaller funding amounts, like $100,000, so requesting an amount that will cover just the equipment you need may be a safer bet. Ultimately, the financially prudent move when borrowing money from anyone is to only request an amount that you can realistically pay back. Of course, a loan is a loan, and the amount you get approved for will always depend on factors such as your income and personal credit history.

To get an equipment loan for a startup company, you’ll need to show evidence of your creditworthiness, as well as the particulars of your business and the equipment you need to finance. Since you can’t produce financial records for a business that is just beginning, you’ll have to rely on the strength of your personal credit profile. At the very least, be prepared to provide the following documents to your potential lenders:

  • Information about the equipment you intend to finance
  • Your personal credit history and your Social Security number
  • Your business plan outlining your expected cash flow and path to profitability

As a startup company, your borrowing options will always be more limited since you can’t demonstrate any track record in your industry. That’s why alternative borrowing options such as Seek Business Capital exist, to finance startup businesses with specific needs. So, don’t be afraid if you can’t get financing with any of the major banks.

Terms on an equipment loan for a startup company are usually short-term in nature. With the exception of heavy equipment, most business equipment becomes obsolete over a relatively short time period, and you won’t want or get financing beyond the equipment’s useful life. Also, as a startup, your risk profile increases. Lenders can minimize this risk by keeping loans short-term.

However, the purpose of working with an alternative lender is not just to get approved, but also to have more flexibility in your financing needs. Working with Seek Business Capital, for example, you can create a custom solution for your equipment financing needs.

6. Companies With 2-3 Years of Financials

How to Get Equipment Financing For Companies With 2-3 Years of Financials

Newer companies that have made it through the tumultuous years of being a startup are in a unique position. They have demonstrated the ability to survive when financing may have been hard to come by and sales were nonexistent. However, the companies that survive these years are often in need of a capital injection to continue growing. If you’re at this stage, your best option is likely an SBA business loan.

  • How Does It Work?

  • What Are the Rates?

  • Am I Eligible?

  • How Much Can I Get?

  • What Documents Do I Need?

  • What Are the Terms?

Contrary to popular belief, the SBA itself does not actually issue any loans. The SBA Small Business Loan program simply works to bring borrowers and lenders together. Lenders are enticed into the program because the SBA guarantees up to 85 percent of the original loan amount in the case of default. This is why the SBA has certain qualification restrictions that make its loan program most appropriate for business with at least a few years of experience under their belt.

Read: 9 Best Small Business Loans

In terms of rates, the SBA is very specific. Loans of greater than $50,000 cost the prime rate + 2.25% for maturities of less than seven years. Longer-term loans are prime + 2.75%. Lenders can charge an additional 1% on loans under $50,000, or an additional 2% on loans of under $25,000.

Although the extension of a loan is up to the underwriting standards of the individual banks, the SBA does publish a list of the minimum qualifications for SBA loan eligibility on its website. Generically speaking, you must be a true “small” business, you must have the ability to repay and you must have a sound business purpose.

The “small” business requirement is defined by either annual revenue of number of employees, depending on the industry. For many industries, $1 million or less in revenue is considered “small,” but for others, it could be as much as $41.5 million. On a size basis, anything from 100 employees to 1,500 may be considered “small,” depending on the industry.

To qualify for SBA funding, you must also have your own equity in your business and must not be able to obtain financing elsewhere. This usually makes businesses in the two-to-five-year window excellent candidates for an SBA loan; as they are past the startup phase, they can show business revenues to pay back the loan, but they may not have enough time in business yet to get easy financing from major banks on their own.

Technically, you can get up to $5.5 million with an SBA loan. However, if you’re looking for an equipment loan, you should expect to get up to the value of the equipment you’re financing, less any down payment. Remember, a loan is not a line of credit that you can choose as you wish. An SBA loan will have payment terms that you must stick with, so borrowing more than you need would be a mistake. You would end up paying interest on borrowed money that you didn’t even use for your equipment, so try to tailor the size of your loan to the amount of the equipment that you truly need.

Since the SBA guarantees a large portion of every loan it approves, you’ll need to provide more documentation for an SBA loan than you might with a generic business loan. Requirements include the following:

  • Information about your personal background, including your criminal history
  • Bios of company management
  • Business plan
  • Personal and business credit reports
  • Personal and business tax returns
  • Business financial statements, including profit & loss reports and balance sheet
  • List of existing business debts
  • Personal and business bank statements
  • Information about your collateral (e.g., the equipment you are financing)
  • Personal guarantee
  • Business licenses and permits, if required

Remember, with an SBA loan you’ll need to convince both a lender and the SBA itself that you have the capability to repay your loan, since both entities are on the hook if you were to default. The more documentation you can provide, the better.

The longest-maturity SBA loans are real estate loans, which can run up to 25 years. Most working capital & machinery & equipment loans run from five to 10 years, depending on the borrower’s ability to repay. You can’t take out an SBA loan for longer than the useful life of the equipment you’re financing.

7. Established Companies With 5+ Years of Consistent Revenue

How to Get Equipment Financing as an Established Company

If you’re an established company that has a track record of five or more years, you’re the dream borrower for most lenders. At this point, your company is likely successful enough that you’ll be able to get a line of credit from a major bank for any future equipment financing needs. A line of credit can be a good option for a large business because you have capital needs on a regular basis. If you have 100 pieces of machinery, for example, you may need to replace one or more at a moment’s notice. In cases like this, it’s nice to have a standing line of credit so you can avoid even a single day of operating machinery.

  • How Does It Work?

  • What Are the Rates?

  • Am I Eligible?

  • How Much Can I Get?

  • What Documents Do I Need?

  • What Are the Terms?

Experienced companies can usually work with any established, name-brand bank that they wish. This can be beneficial because large, international banks often have advanced capabilities and service offerings, particularly for larger borrowers. Rates are often lower because you have to demonstrate financial wherewithal to even get approved.

However, with a traditional bank you should be prepared to do more work when it comes to applying for your line of credit. When it comes to large business lines of credit, you’re not likely going to simply apply online and have your line initiated. You’re going to have to go into a bank and speak directly with a loan officer.

Even though your track record as a successful business lowers the risk for lenders, you’ll still need to prove that you can pay your line back and that your financial situation isn’t likely to change dramatically in the future. Ironically, your funding process might actually take a bit longer if you’re an established business; since your business has a more complicated financial history than a startup, loan officers will have more work to do to get the complete financial picture of your company.

Rates for well-established businesses are likely to be lower than those for startup businesses or entrepreneurs with bad credit. Some banks, for example, currently offer a rate of Prime + 1.75% for well-qualified customers. As a more established business, your negotiation skills can come into play in this arena to help get you the lowest possible rate. As you have some degree of pricing power, you should definitely go rate shopping before you commit to a line of credit.

If you’re an established business, you are usually eligible for all types of loans, including credit lines. The only hitch will be in the amount you want to finance. Larger lines of credit may require more documentation or collateral, but you’re still likely to be eligible unless you’ve shown a propensity to shortchange your lenders in the past. Don’t be afraid to shop around and use your leverage as an established business to get the best offers you can.

As an established business, you may find that getting a large credit line is relatively easy. Credit lines from large banks can easily exceed $5 million, assuming your revenue is sufficient to fund a payment plan. However, just because you are a large, established company doesn’t mean that you need to ask for a larger credit line than you need. You may want a line that’s larger than a single piece of equipment, for example, but you don’t need a line that’s so large it could finance replacing all of your equipment at once. Know that with larger lines of credit, you may be subject to a blanket lien on all your business assets as collateral for the line. Work with your CFO to determine an average line amount that could cover both anticipated and unforeseen operating expenses with your equipment.

Establishing a line of credit is essentially the same thing as applying for a loan. If you want to qualify for the largest amounts, the best terms and the lowest rates, you’ll need to demonstrate significant business capacity and a spotless credit history. Depending on the lender you work with, you’ll generally have to provide some or all of the following documents:

  • Business bank statements
  • Business tax returns
  • Personal bank statements
  • Personal tax returns
  • Profit & loss statements
  • Business balance sheet

As with other types of loans, the better the case you can make for credit line repayment, the more likely you are to get approval on favorable terms, so provide any paperwork you have that can prove you’re a low credit risk.

Terms for business credit lines can vary dramatically from lender to lender. Typically, you won’t have any repayment obligations at all until you begin drawing on your line, at which point you may have to pay back your loan in one year, three years, five years or perhaps even longer. If you pay back your borrowed money faster, you can typically avoid interest charges, just as if you were paying back a credit card balance.

FAQs About Equipment Financing

Since there are so many options for equipment financing, it’s important to know your options and how the process works. To help, we’ve answered some of the most common questions that those in need of equipment finance might ask.

What Is Equipment Finance?

If you can’t pay cash for the full value of your equipment, you’ll have to take out a loan for the remaining balance. This is equipment finance. Just like when you finance a car, you’ll put up a cash down payment and then borrow money to cover the rest. The interest rate you pay on the amount borrowed will depend on your credit history and other factors.

How Does Equipment Financing Work?

The first step in equipment financing is selecting the equipment you want to buy. Since financing equipment will cost you additional money over buying it outright, you’ll want to make sure you only buy the equipment you need and that the equipment you select will generate revenue for your business.

Once you’ve figured out the equipment you need, it’s time to start shopping for lenders. There are plenty of banks and finance companies to choose from, so you’ll have to select the one that is the best match for your needs. Do you need help with the entire financing process, or are you an experienced veteran when it comes to finance? Does your credit profile support a loan application at big banks, or will you need to work with an alternative lender? Do you want to work with a company that understands startup and special needs financing, or do you just need a generic business loan or line of credit? These are starter questions that can help direct you to the most appropriate lender.

What Is Equipment Lease Financing?

Just like with a car, you can either finance or lease your new business equipment. When you finance equipment, you’ll make regular payments that cover the entire equipment value plus interest over the life of the loan. When the loan matures, you’ll own the equipment outright. With a lease, you’ll make payments over the life of the lease that generally correspond with the depreciation of the underlying equipment. At the end of the lease, you’ll return the equipment to the leasing company and have neither further payment obligations nor any ownership claim in the equipment.

The pros and cons of equipment leasing vs. financing are varied. In a general sense, you’ll want to finance equipment when you want to own it at the end of the loan. This makes financing better for longer-term assets that will still have a useful life at the end of the finance period, such as heavy, durable machinery. Leasing often makes more sense for assets with a short-term life, such as computers or other high-tech equipment that rapidly becomes obsolete.

You’ll also have to consider factors such as cash flow and upfront payments when it comes to equipment leasing and financing. For example, if you go the leasing route, you may have an endless string of payments, as you’ll have to pick up a new lease every time an old one matures. With financing, once you’ve paid off your loan, that’s it — you own the equipment, and you won’t have to keep making payments. On the flip side, financing often requires a significant down payment, which means you’ll be forking over cash before your equipment generates any revenue. With leasing, you often won’t have any down payment at all and can use your ongoing revenue to cover your lease payments.

The lease or loan argument is quite common when it comes to financing of any type. You’ll have to do the math and see which option has the lowest total cost of borrowing to help you make the choice of leasing vs financing equipment.

What Is Invoice Factoring?

Invoice factoring is also known as invoice financing or accounts receivable financing. This is a type of financing that can be used by businesses with proven receipts in order to finance other projects, including equipment. In a nutshell, invoice factoring involves putting your accounts receivable up as collateral for a loan; when the invoices are paid off, you use that money to pay back your loan. In this way, you can essentially get a cash advance on revenue that is on its way to you but just hasn’t arrived yet. Invoice financing has its drawbacks — including the fact that it is usually an expensive way to raise capital — but it’s also fast and gives you money when you need it. It’s not an ideal source of replacement financing for a long-term equipment loan, for example, but it is a way that businesses can generate short-term cash.

What Is a Captive Lessor?

A captive lessor is a financing agency that’s tied to a producer or manufacturer, usually in an effort to help sales or profits. The most common example of a captive lessor is the financing arm of a car manufacturer. When you buy a car from Ford, for example, you’ll always be offered the chance to finance your vehicle through Ford Credit. From the perspective of the lender, having an in-house finance company helps keep more customer money within the company. From the perspective of the customer, it’s often easier to finance through a lender that works hand-in-hand with the item financed.

If you’re looking to finance equipment, you may encounter captive lessors that are subsidiaries of or otherwise affiliated with the equipment manufacturer. You’ll have to weigh the costs and the rewards yourself to determine if working with a captive lessor is to your advantage as a business.

What Are Some Ways I Can Improve My Credit to Get a Better Interest Rate When I Finance or Lease Equipment?

When it comes to financing of any kind, including equipment loans and leases, your credit score is a huge contributor to both your ability to get financing and the rate you’ll receive. If you want to lower your borrowing costs, improving your credit score is probably the single greatest step you can take. To improve your credit score, you’ll need to understand its components.

One of the most widely used credit scoring systems is the FICO score. There are five components in the FICO score, with the following weightings:

  • Payment History: 35 percent
  • Amounts Owed: 30 percent
  • Length of Credit History: 15 percent
  • Credit Mix: 10 percent
  • New Credit: 10 percent

Time is your ally when it comes to building a credit score. Just by making on-time payments, more than one-third of your credit score will be solid. As time goes by, an additional 15 percent of your score will be stellar, meaning if you can make on-time payments over a long period of time, 50 percent of your FICO score will be top-notch.

The best move you can make over the short-term to improve your score is to pay off as much debt as possible. This counts for 30 percent of your score and is the only factor that you can improve quickly.

If you have large capital reserves, consider if paying off some of your debt is a good move ahead of applying for equipment financing. Although cash reserves are a plus during the application process, you’ll have to weigh whether a higher credit score is more important to your potential lenders.

You can use credit score simulators to see what effect paying down your debt may have on your score. You might also want to consult a financial advisor or accountant to review your best financing options.

What Are Some of the Risks Involved in Borrowing to Purchase Equipment?

All business endeavors involve some level of risk, and financing equipment is no different. For starters, there’s a cost involved in financing equipment. Cash that goes towards your loan or lease payments is cash that can’t be used for other purposes, such as expansion, marketing or other business uses. You’ll also be paying interest on the money you borrow. If the equipment you finance can’t generate enough revenue to overcome both of these costs, than it can damage the profitability of your business.

In some cases, borrowers can be overly eager to accept the first loan offer that they see, overlooking the bad terms or exorbitant interest rates that may be baked into the deal. Others may choose leasing when financing would be a better option overall, and vice versa.

The bottom line is that any financial transaction is a risk, but you can mitigate those risks by working with a lender that understands your situation and helps you with the best financing deal available. It’s a win-win for both you and your lending company if you can make a good deal, as you can then get the equipment you need to generate revenue for your business and pay off your financing with room to spare.

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