Getting equipment financing can be a short, streamlined way to finance up to 100% of the value of computers, machinery, vehicles or other equipment you need.
How Equipment Financing Work
When you need business equipment, getting a small business equipment loan could be a smart financial move. You can use these loans to purchase virtually any type of business equipment, but how much you can borrow depends on the type of equipment you’re buying and whether the equipment is new or used.
If you’ve ever had a car loan, you already have a basic idea of how an equipment loan works. The equipment serves as collateral to secure your loan, so you probably won’t have to put up additional collateral. Most equipment loans are usually made at fixed interest rates – usually between 8% and 30% – and offer a fixed term length so that your monthly payments are always the same.
How long you can extend the term of the loan depends on the nature of the equipment and its expected life. Few lenders would be willing to extend the term of an equipment loan beyond the expected useful life of the equipment itself.
Some business owners choose to lease equipment instead of getting an actual loan. There may be advantages to leasing, but with an equipment loan, you own the equipment after the loan is paid off. With a lease, you don’t own the equipment once the lease term is over.
The thing to keep in mind with equipment financing is that it prevents you from having to pay the entire cost of the equipment upfront. Although you will have to pay more to finance the equipment, you will be able to spread out the cost over an extended period of time.Let’s say you have a piece of equipment you would like to purchase that costs $10,000. An equipment financing company offers to upfront you the cash to purchase that piece of equipment but will charge you 12% interest to do so. As well, the lender has requested you pay back the loan in 3 years (or 36 months). With a 12% APR, this means that this $10,000 piece of equipment will actually cost you $11,957.15 ($1,957.15 in financing fees). The monthly payments would be $332.14.
Most businesses can qualify for equipment financing. How much you qualify for – and the interest rate you’ll pay – depends on the value of the equipment, your business history, and your credit rating.
Equipment financing can be a great option if your credit rating is less than perfect, as the equipment collateralizes the loan.
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