What is Equipment Loan?
An equipment loan is a type of financing that allows businesses to borrow money specifically for purchasing equipment. The loan amount is typically used to buy equipment like machinery, vehicles, computers, or other tools necessary for the business’s operations.
Comparing Equipment Loan, Leasing, and Financing
Feature | Equipment Loan | Equipment Leasing | Equipment Financing |
Ownership | Yes, after loan repayment | No, unless purchase option is used | Varies |
Initial Costs | Moderate to high | Low to moderate | Varies |
Monthly Payments | Fixed | Fixed | Variable |
Tax Benefits | Interest & depreciation deductions | Lease payment deductions | Depends on financing structure |
Risk of Obsolescence | High | Low | Varies |
Maintenance Responsibility | Yes | Sometimes included | Varies |
Long-term Costs | Potentially lower | Potentially higher | Varies |
Flexibility | Moderate | High | High |
Choosing between an equipment loan, leasing, and other financing options depends on various factors, including your business’s financial situation, industry needs, and long-term goals. What you can buy and what you can afford can be two different things.
Key Features of Equipment Loans:
- Ownership: Once the loan is fully paid off, the business owns the equipment outright.
- Collateral: The equipment itself usually serves as collateral for the loan, which can lower interest rates compared to unsecured loans.
- Term Length: Loan terms typically range from 1 to 5 years, depending on the lifespan and cost of the equipment.
- Interest Rates: Rates can vary widely based on the borrower’s creditworthiness and the type of equipment but are generally competitive due to the collateralized nature of the loan.
Bank Loans vs. Equipment Financing Options
- Bank Loans: Traditional financing through banks has the most competitive interest rates and terms; however, only for well-qualified borrowers who are well organized who can jump through hoops to get it. Going to the bank is guaranteed you’re going to an A Credit Lender. So, are you an A Credit borrower? Do you have your audited financial statements? Do you have personal financial statements prepped? How can you tell whether you’re bank approvable or not. Having good credit isn’t the only criteria they look at. Remember the “5 C’s” in credit underwriting requirements?
- Equipment Financing Companies: Specialize in commercial equipment. Equipment leasing and equipment loans my differ, offering tailored financing solutions like equipment finance agreement where it’s financing rather than leasing. There is no balloon or buyout at the end of the term.
Comparing Business Loan, Leasing, and Financing
Feature | Business Loans | Equipment Leasing | Equipment Financing |
Ownership | 50% | 100% | 100% |
Initial Costs | $0 | Low to moderate | Varies |
Monthly Payments | Monthly, Daily, Weekly | Monthly | Monthly |
Credit Minimum: | 500 | 600 | 650 |
Fund Disbursements | Client | Vendor | Vendor |
New/Used Equipment | n/a | Yes | Yes |
Maximum Term | 24 months | 60 months | 60 months |
Time in Business | 3+ years | Startup OK | Startup Ok |
Interest Rates | Moderate | Low | Low |
Application Only | $150K | $250K | S250K |
