Almost every type of business needs a certain piece of equipment for daily operations. If you own a restaurant, you would need costly kitchen appliances to cook delectable meals. For construction companies, you’d need expensive machinery to use in building real estate. These expenditures are too expensive to fund out of pocket, especially if they’re unplanned. Luckily, business owners can apply for equipment loans to fund these purchases.
An equipment loan is created specifically for the purchase or lease of equipment. You repay the loan in fixed monthly payments within the agreed term.
After the term ends and you’ve repaid the loan, you now own the equipment. Generally, you don’t need to pledge any business or personal collateral since the equipment serves as one. This means that if you default on the loan, the lender has the right to assume ownership.
However, the terms of the loan – including collateral – ultimately depend on the lender you’re working with. Lenders may ask for a personal guarantee or a blanket lien.
A blanket lien authorizes the lenders to repossess the equipment, as well as your business assets if you fail to repay the loan. A personal guarantee works like a blanket lien but for your personal assets.
With that said, it’s crucial that you fully understand the terms of the loan before signing contracts. Don’t hesitate to ask for legal help if needed.
How Equipment Loans Work
Equipment loans are ideal for companies that need to purchase equipment to expand business operations. Some lenders offer 100% financing, while others require 10% to 20% down payment.
The repayment period for equipment loans depends on the amount you’re borrowing. It can be as short as three years or it can extend up to five years or more. You can borrow a minimum of $25,000 and a maximum of $5,000,000 with an annual percentage of 5.25% to 24.99%.
If you need immediate funding, the underwriting process of equipment financing is relatively faster than other types of loans. Some lenders can even provide funding within 24 hours.
With traditional banks, you may have to wait for days or weeks before they process your equipment loan application. This is why many business owners prefer alternative lenders like SMB Compass.
Many business owners prefer to apply for equipment financing online because the process is more streamlined. All you have to do is to fill out an online application, upload the required documents (financial documents, tax records, etc.), and wait for the approval decision within a few hours.
Lenders aren’t too particular with a credit rating in equipment loans. However, most lenders usually require at least one year of business history in order to qualify. Startup companies may find it challenging to secure equipment financing.
Reasons to Apply for Equipment Loans
Here are four other reasons why business owners apply for equipment loans.
1. No Additional Collateral Required
Traditional business loans require you to pledge personal or business assets, such as buildings, vehicles, and more.
Generally, alternative online lenders will not ask for collateral other than the equipment you’re looking to purchase. This is very beneficial for business owners since it reduces the downside risk.
2. Increase Your Sales
By purchasing new equipment through equipment loans, you can significantly improve business operation.
For example, if you own a retail store, purchasing additional point-of-sale systems can streamline the checkout process and serve your customers faster. This can result in happier and loyal customers.
3. Working Capital Needed to Purchase, Lease, or Repair Equipment
As mentioned, equipment loans provide you with the money you need to pay for equipment purchases. You don’t have to wait for months to save up to buy or repair much-needed equipment.
With the funds you receive from equipment financing, you can purchase, repair, or lease the necessary equipment crucial to daily operations.
4. Fixed Monthly Payments
Most lenders will require you to repay the loan in fixed monthly payments. This makes it easier for you to manage your finances, increasing productivity and profitability.
Don’t be afraid to ask lenders if they can match your repayment terms to your business’ cash flow.
5. Assume Equipment Ownership
With an equipment loan, you’ll have the working capital needed to purchase and own equipment and machinery, boosting your company’s assets.
Owning equipment is advantageous to any business, especially if the equipment purchased has a low obsolescence factor.
6. Faster Funding
Reputable lenders understand that sometimes, businesses need immediate funding to take advantage of new opportunities.
If you’re in a cash pinch and you need to purchase or repair equipment, equipment loans are processed faster than traditional loans.
There are alternative lenders can fund your loan within 24 hours. However, the funding speed depends heavily on your situation.
Best Industries for Equipment Loans
Business owners from all industries apply for equipment financing because it has very little restrictions. Both business to business (B2B) and business to consumer (B2C) can definitely apply for equipment loans.
The following are some of the industries that would greatly benefit from an equipment loan:
- Restaurant or bars
- Warehousing and logistics
- Hotels or lodging
- Beauty salons and spas
- Retail stores
- Auto repairs and sales
- Landscaping services
- And more!
Tips to Increase Chances of Approval
What can you do to increase your chances of approval?
Keep in mind that an equipment loan application varies from lender to lender. But here are a few tips on what you should do in order to qualify for equipment loans:
1. Prepare Business Information/Documents
Since you don’t have to secure the loan with collateral, lenders may ask you to submit less paperwork than compared to traditional loans.
Most of the time, they will only ask you to submit basic business information and documents, such as contact information, ownership information, federal tax ID numbers, and more. They also want to know if your business is a sole proprietorship, an LLC, or a corporation.
2. Mind Your Personal and Business Credit Rating
Another factor lenders want to check before approving your loan is your personal and business credit score. Your credit score says a lot about the likelihood that you will pay back the loan.
It’s important to note that you don’t have to have a perfect credit score to qualify for equipment loans since the equipment is the one securing the loan.
However, lenders are more likely to approve borrowers with a personal credit score of at least 600 and/or a business credit score of 75 or more. Some lenders are flexible but it’s better to be safe than sorry.
To avoid wasting time and money, and to increase your chances of approval, it’s best to work on your credit before applying for business loans.
If your score is lower than 600, there’s still hope. Proactively improve your credit score by paying your bills on time, correct mistakes on your credit report, and more.
3. Gather Your Financial Statements
Lenders will require you to submit your business financial statements, such as financial statements, tax records, bank books, and more, as well as your credit information. Here are some of the documents you need to submit:
- Business Licenses
- Commercial Leases
- Articles of Incorporation
- Balance Sheet and Income Statement
- Personal and Business ITR
- Personal Resume
4. Be Familiar with the Requirements and Qualifications
It’s important to meet the lender’s minimum qualifications and requirements. While some lenders are more flexible than others, surpassing their minimum requirements greatly improves your chances of getting approved.
Lenders may set a minimum requirement for annual revenue, the number of years in business, and credit scores.
5. Create a Strong Business Plan
Since lenders are letting you borrow their money, they want to know how you’re going to use the funds.
They also want to see if you’re capable of repaying the loan, so they usually require a solid business plan that outlines the purpose of the loan and how the funds contribute to profitability.
Make sure that your business plan clearly shows the current and projected financials. It’s also important to show that your company has enough cash flow to pay for the loan on top of daily business expenses.
A great business plan shows lenders that you’re serious in pursuing funding for your business.
Every business plan should detail the following:
- Company Description
- Management Team
- Product and/or Service Description
- Competitor Analysis
- Mission and vision
- Advertising, Marketing, and Sales Strategies
- SWOT Analysis
6. Look for the Best Equipment Loan Lenders
Once you’ve gathered all the information you need, you can now shop for loan providers. Look for reputable lenders that have enough experience with your industry. Make sure to compare loan terms and interest rates before settling.
Apply for Equipment Loans Today!
The process of an equipment loan application is faster and more convenient than traditional business loans from banks. SMB Compass offers equipment loans for businesses belonging to every industry.
Our financial experts will walk you through the entire process – from inquiries to closing! Call us today at (888) 853-8922 for a free, no-obligation assessment.