Because most companies use equipment of some type, a small-business equipment loan is something every owner should consider. It might just be a laptop and a phone, but it could be as elaborate as manufacturing robotics. Either way, equipment can be the key to profit and productivity.
The challenge is how to afford new or upgraded equipment when you need it. Sure, an equipment purchase can pay for itself over time, but you still have to come up with the money to buy it upfront. That’s where an equipment loan can help.
An equipment loan is money lent at interest to your small business so that you can buy the machinery and technology you need to grow or operate more efficiently. Banks offer small-business equipment loans to good customers and businesses that have solid credit. Equipment manufacturers and dealers sometimes also have loan programs for equipment financing.
Because there are so many different types of equipment financing loans — some riskier than others — it’s very important to carefully read through and understand the terms before signing any agreement.
One of the biggest sources of small-business financing is available through the Small Business Administration’s 7(a) loan program. The SBA guarantees 85% of the principal up to $150,000 and 75% over that amount for selected types of small-business loans.
Because the SBA works through carefully vetted and licensed lenders, your risk is reduced. Too often, small businesses in need of cash fall victim to predatory lenders who add hidden fees, penalties and high interest rates. With the backing of the SBA, banks face less risk themselves, so they’re more able to offer favorable terms for equipment financing.
Popular SBA 7(a) loan options include:
An alternative to a small-business equipment loan is to consider leasing the equipment you need. You don’t need to come up with upfront cash beyond a small initial down payment. A traditional equipment loan will require you to pay more upfront.
Leasing can make sense when technology and energy efficiency are evolving quickly. Many leases give you flexibility, so you can upgrade easily. Some leases expedite trade-ins and trade-ups.
If you want to keep the equipment at the end of the lease, many arrangements offer attractive buy-out terms. You’ll end up paying a bit more if you lease small-business equipment vs. buying it. But depending on the lending and lease terms, the difference may be worth it. Efficient operation with regularly upgraded equipment may end up covering that cost gap with energy savings and increased productivity.
Applying for SBA loans is straightforward. For a standard 7(a) loan, you can borrow up to $5 million with a revolving line of credit open for up to 10 years. For amounts over $350,000, the lender will need to collateralize the loan. You can borrow up to $350,000 for up to seven years under the SBA Express program. Eligibility varies by lender.
The 504 SBA loans are more complex. You must document that you’ll create or save one job for every $65,000 to $100,000 that you borrow. Alternatively, you’ll need to show that you’re contributing substantially to the local economy, bringing new income or development to the area. Expanding a woman-, veteran- or minority-owned business can also satisfy requirements. Certain areas, like modernizing manufacturing, adding robotics or increasing competitiveness globally are program goals. These loans max out at $5 million to $5.5 million and do require collateral. Interest rates are pegged at the current rate for five- and 10-year treasury notes.
You must meet the following requirements to qualifying for a small-business equipment loan through the SBA:
Many businesses are ineligible, including (but not limited to) religiously affiliated organizations, gambling operations, businesses involved in speculation or lending, and businesses involved in illegal activities. Your business may come under various special considerations, some of which are spelled out on the SBA site.
If you are eligible, here are some examples of what can be purchased with a small-business equipment loan:
Healthcare, dental, veterinary care: Medical devices, diagnostic equipment like MRI machines, IT equipment, lab devices, beds and gurneys.
Construction: Heavy equipment, lifts and cranes, tools, trucks and computers with CAD software.
Agriculture: Tractors, harvesters, milking equipment, processing equipment, irrigation systems, testing devices and transportation.
Food and hospitality: Ovens, kitchen appliances, cleaning equipment, packaging and serving equipment, lighting and transportation.
Manufacturing: Machine tools, assembly line equipment, robotics, software, packaging and shipping machinery.
Offices: Computers, printers and communications equipment, along with furniture.
Real estate: Including staging furniture, IT and advertising.
Retail: Store fixtures, window displays, signage, POS and inventory control systems and other IT.
Getting a machinery and equipment loan can help your business afford the technology it needs to grow and profit. It helps to have the money now for benefits that pay off in the future.
Getting an equipment financing loan can bring significant benefit to your business.
Every business decision involves some level of risk. Taking on debt can help your business prosper. But the wrong terms at the wrong time — and spending on the wrong things — can hurt your business.
Applying for your loan will be easier and faster if you’re prepared. Working through these steps will also help you determine a safe amount to borrow and improve the loan approval process for equipment financing.
Small-business equipment loans can be a powerful driver of business growth, efficiency and profit if you plan well and use care. Equipment financing can put the benefits in your hands today while delaying the costs into the future — after you’re already reaping the profits of the investment.
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