Equipment loans are sometimes necessary for a small business to purchase new equipment, replace existing equipment, or refinance equipment. Equipment loans are usually used to purchase larger equipment that will retain its value. This might include tractors, heavy construction equipment (a backhoe or dump truck), commercial vehicles, expensive medical imaging equipment, office printing machines, or restaurant dishwashers.
When a small business goes to a bank or equipment financing company and takes out this type of loan instead of purchasing the equipment outright, they are able to hold onto some of their cash necessary for the continued operation of the business and spread out the payments of the loan. Most equipment term lengths are between 2 and 7 years, but 10-year term lengths are sometimes available. The equipment loan eases the burden of suddenly taking on a large debt and potentially jeopardizing the business by having a smaller amount of cash on hand. At the end of the long term, the borrower will own the equipment outright.
Depending on the industry, the definition for ‘Small Business’ is different in terms of the number of employees or maximum receipts. A business can have as many as 1500 employees with nearly $40 million in annual receipts and still be considered a small business. For this reason, small business equipment financing amounts are often between $10,000 and $500,000 with rates that are usually between 6% and 9%. For a newer business or one with bad credit, equipment loans are available for high as 16% – 20%.
What the Lender Is Looking For:
Lending institutions usually want to see a small business that has a down payment between 5% and 20%, and the borrower should have a credit score of at least 550 – 650. As collateral, a small business uses the financed equipment itself, a personal guarantee (borrower’s personal assets), or a blanket UCC lien, which allows the lender to seize the assets being used as collateral. A lender prefers that a business has been in operation for at least one year, but anywhere from 6 months to 2 years is common. Lenders also want you to have at least $50,000 in annual revenue. If a borrower does have a lower credit score but can still prove a good record of recent revenues, they might still qualify for an equipment loan.
As part of proving that a business is worthy of repaying the loan on time, lenders can require bank statements, tax returns, equipment invoices, a business balance sheet, a profit and loss statement, or business licenses. They might also want to know about what the anticipated equipment-related costs will be. This can include the cost of hiring someone to operate the machinery, insurance for the machinery, maintenance of the machinery, or training on how to operate and maintain the machinery.
Before a business attempts to secure an equipment loan, they should do their homework on what the expected rates and terms will be and gather all of the necessary documentation. An equipment loan can be the perfect answer to continuing or increasing operations so a company can maximize its profits.
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