If you’re a small business owner, you understand how important it is to quickly and economically obtain. Upgrade or replace the equipment needed to perform your daily tasks. Purchasing equipment outright can put a substantial strain on your cash flow. Equipment financing may be the ideal solution to keep your business functioning at optimal performance. To expand to meet increasing demand. The following will provide an overview of how equipment financing works. What rates and terms can you expect in today’s marketplace? What are the basic qualifications for these loans, and where can you obtain such a loan?
We are going to discuss:
How Does It Work?
Average Rates and Terms?
How do I qualify?
Where to Get Equipment Loans?
How Does Equipment Financing Work?
Equipment financing refers to a loan used to purchase business-related equipment. Such as a restaurant oven, a vehicle, or a copier scanner. Equipment loans provide periodic payments over a fixed term, including interest and principal. As security for the loan, the lender may require a lien on the equipment as collateral against your debt. Once you pay the loan in full, you own the equipment free of the lien. The structure of an equipment loan may also impose a lien upon additional business assets or require a personal guarantee. Failure to pay your loan may result in your business or personal assets repossessing. In the case of a personal guarantee. A careful review of the loan terms is vital to understanding your risk.
For example, if you are opening a restaurant, you will need a lot of equipment, including a commercial range, ovens, and a refrigerator. Let us say the equipment costs a total of $75,000. You apply and get approval for an equipment loan equal to 80% of the equipment’s cost, or $61,500. That means your out-of-pocket expenses will be $13,500, and you can retain $61,500 in your cash reserves to offset all the other costs associated with a new business, including the space, marketing, advertising, permits, and licenses.
Equipment financing and Equipment leasing
Equipment financing is distinct from equipment leasing, wherein you pay the owner of the equipment periodic rent for use over an agreed-upon period. Unless you agree with the owner on renewal terms or a buyout at the end of the lease term. The equipment is returned to the owner. Generally, the qualifications for leasing are less stringent than for financing; however, if the equipment is necessary to your business, the endless payments on leased equipment without the prospect of future outright ownership may prove a more costly option.
Equipment Financing Rates and Terms
As with all financing, rates and terms will vary depending on an applicant’s qualifications and current market conditions. Below are sample rates and terms you can expect when shopping for an equipment loan.
Loan to Value Ratio = Up to 100%
Fixed Interest Rates = 4.00% – 12.75%
Repayment Terms = Several months up to 10 years or more.
Funding Speed = As little as 2 business days
Other Requirements = May have a minimum credit score or operating history requirements.
Qualifying for an Equipment Loan
Lenders will vary in their requirements to obtain an equipment loan. The following are general qualifications a lender will look at. When making a credit decision, however, underwriting standards vary and should be vetted before choosing a lender to ensure you meet their minimum requirements.
Your personal credit score will be important in obtaining an equipment loan. You can find your credit rating online if you are unsure of your current credit score. The higher your score, the more likely you are to get approved and the better loan terms you can anticipate.
Lenders may require Business Plan
In addition to a credit score, lenders may require a business plan that describes your business and a detailed proposal for future growth. The basic goal is to give prospective lenders a comprehensive summary of your business. The number of years you’ve been in business and the annual revenue of your enterprise are significant factors to include in your business plan. Some lenders may have threshold requirements such as a minimum of two years in business with annual revenues of over $250,000.
Beyond a statement of revenues within your business plan and a profit and loss statement, lenders’ applications may require a balance sheet or cash flow statement. These should identify the revenue coming into the business and the expenses going out. These statements help lenders assess the financial strength of your business. Since lenders are also interested in the personal finances of a small business owner, personal financial statements should also be prepared. Preparation of all pertinent application documentation is important to help expedite the process. Hiring a qualified accountant in anticipation of applying for an equipment loan is advisable to ensure your finances are in order.
Where to Get Equipment Financing
There are several options available in the marketplace for obtaining equipment financing. Equipment loans can be obtained from traditional national lenders to specialized online lenders. Traditional national lenders, like Wells Fargo and Bank of America, generally have stricter underwriting requirements but better rates and terms. They may be more suitable for established businesses with strong cash flow and assets. Specialized online lenders like BitX Funding tend to be more flexible with their underwriting requirements. However, the rates and terms will be less favorable. This type of lender is more suitable for startups or businesses that do not meet the minimum credit and asset requirements of national lenders. The option you choose will depend upon your business’s qualifications and the loan type that best suits your needs.
In addition to an equipment loan, small business owners can also consider obtaining the money needed to purchase equipment via a business credit card, invoice financing or factoring, or angel investing. Each has its pros and cons regarding terms, turnaround time, and qualification requirements.
BitX Funding is an online marketplace for small business owners looking to fund a project. We specialize in connecting small business owners with lenders who will compete for your business. We believe small business owners drive the economy and are passionate about helping your company reach its full potential.