When you decided to expand your construction company or grow your bakery, you knew that would mean more equipment. But paying upfront for excavators and industrial size ovens can seem impossible for small businesses. That’s why business capital lenders offer equipment financing.
Equipment financing can give you access to the capital you need for those essential tools now without forking out thousands of dollars from your own pockets. Never applied for equipment financing before? No problem. We’ll walk you through this funding option and explain how it can help you to strategically grow your business while supporting your business goals and financial health.
What Is Equipment Financing?
Equipment financing is a type of funding specifically used to acquire physical business assets. The equipment secures the financing, meaning lenders offer lower rates than an unsecured loan, since they could repossess the asset if you default.
To finance your equipment, you’ll either take out a loan to purchase the equipment outright or enter a lease agreement to use the equipment over a set period. In both cases, you gain access to the machinery you need now and pay for it over time, typically in monthly installments.
What Equipment Qualifies for Financing?
One of the strengths of equipment financing is its versatility. As long as the equipment serves a business purpose and holds resale value, it’s usually eligible for funding. That includes:
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- Vehicles for delivery, transportation, or service
- Machinery for construction or manufacturing companies
- Commercial kitchen equipment
- Dental and medical devices
- POS systems
- Equipment for agriculture
- IT infrastructure
- Office furniture and fixtures
Be prepared to provide a quote or invoice for the equipment you need. Lenders often require that information in an application for equipment financing.
Why Consider Equipment Financing?
The most significant advantage of equipment financing is that it preserves your working capital. You don’t have to deplete your reserves or divert funds from other operating costs to acquire the necessary tools. You can invest in the equipment you need and use the revenue it generates to pay off the loan or lease. It’s a powerful tool for cash flow management and strategic expansion.
Imagine you operate a bakery and want to add a second oven to double production. That could cost you between $4,000-$8,000. With small business equipment financing, you get the oven immediately without depleting your savings. Now you can fulfill more orders and use the added income to cover your monthly repayment.
Equipment financing also offers a competitive funding option for new small businesses or those with lower credit scores. Securing your loan or lease with your asset lowers the risk for lenders, so they are more willing to offer financing.
Tax breaks are another benefit of equipment financing. Depending on your loan or lease structure, you could write off depreciation, interest expense, or lease payments that decrease your total cost of ownership. Talk to your accountant when you consider equipment financing options.
Loans vs. Leases
Equipment financing is available as a loan or a lease. Since they operate differently and come with unique benefits, be sure to choose the right one for your situation.
Equipment Loans
An equipment loan or equipment financing agreement (EFA) provides a lump sum to purchase a specific asset. You buy the equipment, making you the legal owner. You repay the loan and interest over a fixed term with regular payments. Once the loan is paid off, you own the equipment free and clear.
The loan term usually matches the expected life of the equipment. For example, if your plumbing company is financing a point-of-sale (POS) system expected to last five years, a lender usually structures your repayment term to end around the same time.
Consider an equipment loan if you know you want full ownership of the asset. Once the loan is complete, you will be responsible for maintenance, repairs, upgrades, or reselling the equipment when you no longer need it.
Equipment Leasing
Leasing gives you access to equipment without owning it. You make monthly payments to use the equipment for a set term. An operating lease is like renting, while a capital lease is like a rent-to-own option. Depending on your agreement, lenders may also offer to upgrade to a newer model at the end of the lease.
Leasing typically requires less upfront cash and lower monthly payments than an equipment loan. The length of the financing varies depending on the type of equipment and lease agreement. Generally, operating leases are short-term (three months to five years) while capital leases are for the asset’s useful life (like an equipment loan).
With an operating lease, you use the equipment for a limited time and return it when the lease ends. These are ideal for short-term or fast-depreciating assets. Say your small animal clinic needs new diagnostic machines but will probably have to upgrade in two to three years. An operating lease would allow you to regularly refresh your equipment without tying up more capital.
Capital leases or finance leases function like purchases. You pay toward ownership and often have the option to buy the equipment at the end for a small fee. Pay attention to current pricing at the end of your lease, or you may end up paying more than the item’s purchase price.
Equipment Loan or Lease?
The choice between leasing and a loan to buy depends on your business goals, cash flow, and how long you intend to use the equipment.
Consider an equipment loan if:
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- You want to own the equipment long-term
- The asset will be helpful and retain its value for many years
- You can afford the upfront cost of a down payment
- You want to maximize tax deductions
Consider equipment leasing if:
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- You want to use the equipment for several years
- Ownership is not essential
- Upgraded versions are regularly available
- The value of the equipment depreciates quickly
- You want to preserve your cash reserve
- You need to prioritize cash flow
From a Dream to Reality
Equipment financing gives you a practical way to access your ideal tools without waiting years to have the money in the bank. In fact, access to the equipment you need can fuel your growth years ahead of schedule. That commercial construction contract you couldn’t take on suddenly becomes possible with heavy equipment financing to give you the vehicles you need.
If you plan your business needs, research funding options, choose the right financing option, and use your funding wisely, the additional assets can help you make your small business dream a reality.
