What is Equipment Financing?
While the average small business needs about $10,000 in startup capital, that amount needed increases fast when you need expensive equipment to carry out your business operations. Flatbed truck transportation companies, laundromats, and other manufacturers require heavy, expensive equipment to operate.
Luckily, there are many options for business financing. You might consider a business loan, line of credit, or even venture capital. But if your business needs equipment of substantial value to operate, equipment financing might be a better option.
What is Equipment Financing?
Equipment financing is access to money that can be used to purchase, maintain and operate expensive equipment for business operations.
Common types of equipment used with equipment financing include:
- Company trucks and cars
- Cannabis growing materials
- Office furniture and computers
- Manufacturing machines
- Medical and scientific equipment
Equipment financing is either in the form of an equipment loan or equipment lease.
An equipment loan is an asset-based loan since an asset secures it. Businesses that obtain equipment loans can secure the loan with the equipment itself. The lender takes the equipment as collateral if the business defaults on the loan.
This is especially great for businesses that might not have the strongest credit score since the collateral offers more security to the lender. Additionally, the collateral of equipment makes it easier for the business to obtain a loan that’s close in value to the equipment. Some lenders might lend 100% of the equipment value, though 80% is more common.
Interest rates vary for equipment loans, and can range anywhere between 4% to 30%. Rates depend on a few factors, including the loan term length, the equipment’s predicted depreciation over time, the business’s history, and the business’s credit score.
If you aren’t confident that you can make all your loan payments on an equipment loan, equipment leasing might be a better option. While you’ll still have to make monthly payments to lease the equipment, the payments will certainly be lower. Additionally, you don’t need to save up for a down payment or pay high interest rates.
Equipment leasing is a great option for businesses that don’t have any use for the equipment after the lease term.
Why Do Businesses Use Equipment Financing?
Many companies use equipment financing because the equipment they need to conduct business is costly.
For example, flatbed trucks cost anywhere between $40,000 to $100,000 per truck. And, the cost of office furniture can set a business between $1,200 to $4,000 per employee workstation. Imagine what that looks like for an office space with 30 employees!
Benefits of Equipment Financing
- Financing for expensive equipment
- Higher likelihood for approval since equipment loans are secured by the equipment
- Lower interest rates with secured loans
- Interest is tax-deductible
- Ownership of a high-value asset at the end of the loan term, which businesses can use to secure other loans with more favorable terms
Is Equipment Financing Right For My Business?
Equipment financing has many benefits, but it’s not the right financing solution for every business. Equipment loans are restricted to equipment purchase, maintenance, and repair, so companies can’t use that financing for any other purpose.
Equipment financing is an excellent option for your business if:
- you require expensive equipment to operate your business
- you don’t need financing for other business needs, like monthly cash flow
- the equipment will retain value
- there’s a need for more equipment loans in the future, as you can use your new asset at the end of your first loan to secure future loans
Equipment Financing vs. Other Financing Options
Equipment financing offers unique benefits to businesses that aren’t offered by other financing options. Here are some alternative financing options and information about how they differ from equipment financing.
Venture capital could assist a business in purchasing expensive equipment needed to operate. Since this financing isn’t a loan, businesses would purchase the equipment without paying the money back. However, venture capital comes at a price, and that price is equity in your business. With equipment financing, you still have 100% control of your business.
Invoice factoring is a method of financing that gives businesses capital in exchange for their accounts receivables. In other words, lenders offer financing based on a business’s open invoices.
This is a great option for businesses with slow-paying clients; however, it’s unlikely that a business that needs expensive equipment could secure a loan based on open invoices. Without equipment, they wouldn’t be able to conduct business and issue an invoice in the first place.
Get Started With Equipment Financing Today
Here at Intrepid Finance & Venture, we’re passionate about providing capital for business growth. Whether you’re in the technology field or the transportation industry, we have diverse financing options to fit your needs.
Apply for equipment financing today, and grow your business.