Understanding business equipment financing

For any type of business—big or small—having access to reliable equipment is necessary to maintain operations and bring in revenue. These tools and technologies are essentially your lifeline for developing products and keeping things running smoothly. Therefore, it’s important to be able to improve or replace equipment when necessary to stay competitive.

This is where equipment financing could come into play.

Getting an equipment loan could not only help offset high costs, but it could also offer significant advantages that help propel further growth and success for your business.

What is equipment financing?

Equipment financing is a type of loan or lease used specifically to purchase business equipment.¹ It gives individuals a way to get the equipment they need right away while making manageable payments over time until the debt is paid back in full. Plus, if you’re just getting your business off the ground, it could be an especially helpful and fast way to get up and running without spending all of your cash upfront.

Companies can take out loans to purchase a variety of equipment including²:

• Machinery
• Printers and copiers
• Medical or industrial equipment
• Computer systems
• Office furniture
• HVAC systems

Business equipment lease vs. loan

When it comes to how you finance your equipment, there are two different methods to consider: acquiring a loan or a lease. With an equipment loan, you own the equipment once you have fully paid off the borrowed amount over a fixed term. If you choose to lease, it means you’re entering into a rental agreement with the vendor to only borrow the equipment until the deal expires. There will still be a required monthly payment and rates will vary by company. Once the lease term concludes, you'll likely have the option to purchase the equipment.³

Benefits of equipment loan financing

While terms may depend on the lender, in general, you likely have the ability to finance 100% of the total purchase through a loan with repayment periods potentially spanning over 10 years or as short as 36 months. This will overall depend on how much you’re borrowing. In terms of the waiting period, you may even receive an approval as soon as 24 hours and then receive funding in two business days.¹

A few other advantages include:

Cash flow protection – Without having to make large payments upfront, businesses can conserve capital to invest in other areas.⁴

Growth support – An equipment loan is a valuable investment that helps you preserve cash without having to save up first. 

Fewer requirements – Unlike other business loans, equipment financing does not require strict underwriting. There’s also less risk for securing the loan because the equipment can be used as collateral.²

Benefits of equipment leasing

If you choose to lease equipment, there is generally no requirement for a down payment like there is for a loan.² This is one of the main benefits for businesses because it allows you to preserve cash for other purposes instead of using it for a down payment. Plus, leasing makes it easier to: 

Update equipment and scale operations — Whenever you need to upgrade or replace equipment, it’s simple to return the old model in exchange for a new version.³

Gain tax credits — Oftentimes, you can deduct your equipment loan payments as a business expense through the IRS Section 179 rule, which allows you to deduct the loan expense all at once and realize the tax benefit sooner.^3,5

How to get equipment financing

Any type of business can benefit from equipment financing. This includes medical machinery, computer systems, printers, restaurant appliances, printers and more. But before diving right into the financing process, it’s important to determine what works best for your company. Start by asking the right questions so you can make well-informed decisions about leasing or buying equipment.³

How much flexibility do you need?

Does your industry have seasonal highs and lows? Is your revenue on a predictable schedule? Consider these questions when researching loan or lease terms.

What is your monthly budget?

Make sure you know what you can afford upfront and factor these costs into your cash flow.

What is your timeframe?

Determine how long you expect to use the equipment. If it’s short-term, leasing is more suitable. Otherwise, a loan is a better option if you’re using the same equipment for three years or more.³

What is the lifetime of your equipment?

Depending on what industry you’re in, there may be a more immediate need to update technology. Consider how long you expect pieces of equipment to last so you can decide if it makes more sense to lease or buy.³

Business equipment loan and leasing eligibility requirements

Securing a loan for your equipment marks an exciting page in your business’s success story. And while the journey may require several steps to find the most suitable way to attain financing and complete the process, it’s worthwhile to help you grow.

First, consider your personal and business credit scores, desired loan amount, how long you've been in business and your preferred repayment terms.¹ Here are some general eligibility requirements to keep in mind as you decide what works best for you and your business:

1. Equipment Loans

   While it’s possible to get full financing, there are some lenders who may require a 20% down payment. You're required to have a minimum credit score of 600 and need to be in operation for at least one year. And the good news is, these loans can be funded in as little as two business days.¹

2. Term Loans

   These are repaid over time and set up similarly to a car loan or mortgage. To qualify, you need to be in business for at least two years, make $200,000 in annual revenue and have a credit score of 660.¹

3. Small Business Administration CDC/504 Loans

   These are available to for-profit businesses with a net worth less than $15 million. Borrowing limits can be as high as $5.5 million, but can also include a fee. The approval process can also take up to eight weeks.¹

4. Small Business Line of Credit

   With this type of funding, money is available that you can draw from again and again. A well-established business and high credit score could result in a line of credit near $1 million. However, a lower credit score would result in higher interest rates, even up to 36%.¹

5. Business Credit Card

   Credit limits are typically capped at $100,000 so this option may be best for business owners that want to earn rewards for smaller equipment purchases. For example, earned points could be redeemed for travel miles. There is typically an annual fee, and interest will accumulate if purchases are not paid off in a timely manner.¹

6. Leases

   Leases are best for equipment that needs more regular updates. In the long run, leases can be slightly more costly, but you can get newer equipment with smaller, more manageable payments.³

Once you’re ready to apply for a loan—and have consulted your financial advisor if you have one—be diligent in preparing your application and documents. Check with your lender for specific requirements, but you'll likely need the following at a minimum⁶: 

• Business license and registration
• Business plan
• Business bank statements from the past year
• Business tax returns from the past three years
• Financial information such as accounts receivable, balance sheets and income statements

On the other hand, the leasing process may follow these general steps, but will likely vary based on your vendor.³: 

1. Complete an equipment lease application. 
2. Ensure your business's financial data is easily accessible to your lessor. 
3. In one to two days, you’ll receive a decision about your approval. If you’re financing more than $100,000, you may need to provide a business plan and complete financials as well. 
4. If approved, you will then review the lease terms and send signed documents back to the lessor. This is also when the first payment is typically due. 
5. Lastly, the lease will go into full effect once the signed documents are received. You can accept equipment delivery and begin any necessary training with your team. 

Are you ready to start pursuing your business equipment loan or lease? Be sure to keep these steps in mind, do your research, consult with your financial advisor, and understand your lenders’ requirements so you can get on track to help take your business further.  

To learn more about how we can help protect your business, employees and customers with the right coverage, read more about Nationwide business insurance.