3 Ways to Finance Your Business Equipment

The cost of the equipment occupies a large part of your business expenses. Obtaining funding for equipment is especially difficult for small businesses as their cash flow has not yet been established. However, having the right equipment is essential for your business to function optimally.

There are many ways to finance commercial equipment. As long as you know what and where to look, you can find a way to finance, upgrade or repair your business equipment. But what types of financing should we consider? Here are some of them.

term loans

A term loan offers business owners cash in exchange for payment terms. Term loans are generally more suitable for small businesses with established cash flow and financial statements. However, some companies borrow cash to keep their work flowing. Therefore, these loans are quite popular among businesses and banks have established financing programs to help them.

How are term loans obtained? Find a lender or bank to apply for a term loan. You provide financial statements or other evidence to prove your creditworthiness. If your application is approved, you will get a lump sum of cash that will be repaid over a set period on a monthly or quarterly basis, just like a traditional loan.

Also, term loans come with fixed or variable interest rates. If the cash is for equipment, it would also affect the payment terms. Typically, the loan will be converted to a secured loan where the equipment becomes collateral. That means if you default on the loan, the equipment will be a form of loan repayment.

equipment loans

As the name suggests, this loan product is designed to give the borrower a lump sum of cash to purchase, repair, or upgrade their equipment. You can get this loan from a bank or alternative lenders.

Generally, with an equipment loan, you can finance 100% of the total value of the equipment. Also, the annual percentage rate is commonly between 8-30%. However, it is common for lenders to require at least 5-20% of the total value of the equipment as a down payment. Approval is usually quick; you can get the money within the week because the loan is guaranteed.

SBA 504 Loans

SBA 504 loans or more commonly known as CDC/504 loans are offered by certified development companies backed by the federal government. SBA 504 loans are part of the US Small Business Administration’s three main loan programs, along with microloans and 7a loans.

These are used to finance major business purchases, such as real estate or machinery. SBA 504 loans provide money such as fast cash, but it is specifically aimed at the purchase of equipment. Loans are typically capped at up to $5 million, but some qualified projects are sometimes allowed at least $5.5 million.

  • The funding itself comes from three places:
  • A Certified Development Company: 40%
  • Bank or credit union: 50%
  • The business itself: 10% (It can reach up to 20%, depending on the project, and acts as an advance on the loan itself).

Who can qualify for the SBA 504 loan? Like other types of business loans backed by the federal government, borrowers must meet a few requirements before they can be approved. The usual requirements are:

  • For-profit companies operating in the US
  • Average income of less than $2 million for two years prior to application
  • A net worth of less than $15 million
  • The project itself may support various jobs or meet other public policy objectives.

To get an SBA 504 loan, you need to find a certified development company. These nonprofits will generally be the ones that will process your application, coordinate your financing, and submit your loan package to the SBA. The loan will typically take a month or two to close if your application is approved. It may be longer if your purchases are quite complicated.

Last words

Equipment can be expensive, but it is necessary for your business to run. Luckily, there are several ways to finance it. If you’re not sure where to start, you can start by looking at financing methods similar to those mentioned above.

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