Guide to Equipment Loans: Everything You Need to Know

Updated on April 17th. 2024

At first glance, an article that covers the basics of equipment loans may seem rather pointless. After all, aren’t equipment loans used for purchasing equipment? Well, the answer may surprise you and help you understand why there’s more to the story!

At first glance, an article that covers the basics of equipment loans may seem rather pointless. After all, aren’t equipment loans used for purchasing equipment? Well, the answer may surprise you and help you understand why there’s more to the story!

The short answer is yes, equipment loans are indeed used for purchasing equipment. However, several other types of financing solutions can also be used to buy equipment, such as working capital loans, business lines of credit, invoice financing (a.k.a. factoring), and merchant cash advances.

However, unlike those solutions, equipment loans are structured differently — and that’s why understanding how they work is important and valuable if you choose to head in that direction.

Here are the 5 key things that you need to know – but before that, let’s get a better understanding of what equipment loans exactly are:

What Are Equipment Loans?

Equipment loans, also known as equipment financing, are a type of financing specifically designed for the purchase of machinery, tools, vehicles, or technology needed for day-to-day operations. In most cases, the equipment itself serves as collateral, aka it provides a guarantee for the lender against defaulting.

Repayment terms vary but typically match the expected lifespan of the equipment, which can range from a few years to a decade. Interest rates may be fixed or variable, and you can choose between leasing options or traditional loans depending on your preferences and financial circumstances.

Overall, equipment loans offer businesses a convenient way to acquire necessary assets while preserving cash flow.

What Are Equipment Loans Used For?

While other types of financing have broader purposes, equipment loans have a very specific purpose: the purchase of equipment.

Let’s take a look at what types of equipment you can acquire with this form of financing:

• Purchasing machinery
• Acquiring tools and equipment
• Buying vehicles
• Investing in technology
• Obtaining furniture and fixtures
• Upgrading outdated equipment
• Expanding production capacity
• Improving operational efficiency
• Staying competitive in the market

Put simply, if your business requires a significant investment in a physical asset, an equipment loan allows you to divide the cost into affordable installments spread over time.

What Are The Benefits of Equipment Loans?

Equipment loans come with multiple benefits for businesses, providing a convenient and efficient means to acquire essential assets while supporting growth and operational efficiency. Some of them include:

• Capital preservation – this type of financing allows you to preserve cash flow by spreading the cost of equipment over time
• Improved cash flow – instead of losing potential liquidity by providing large upfront payments for equipment, you can maintain your liquidity with equipment loans.
• Ownership – when you take out an equipment loan, the lender purchases it on your behalf, and you become the owner once the loan has been paid.
• Tax benefits – Purchasing equipment for your business also qualifies you for tax deductions on interest payments and equipment depreciation.
• Up-to-date technology – this type of financing enables businesses to stay competitive by investing in the latest equipment and technology.
• Flexible terms – equipment loans provide a lot of flexibility when it comes to repayment terms, as they are tailored to your financial situation.
• Asset security – this financing option means that you can use the purchased equipment as collateral, reducing the need for additional security.

Things You Need to Know About Equipment Loans

• Equipment loans typically cost less than other types of business financing.

Equipment loans are secured by the equipment that will be purchased with cash (similar to how car financing companies often use the financed vehicle as collateral). This reduces the lender’s risk, and translates into a lower cost of borrowing vs. unsecured business funding products.

• You should retain the right to choose the vendor you want

Some lenders that offer equipment loans oblige borrowers to choose from a limited pool of vendors. Be assured this is by no means a legal requirement, nor is it in your interest.

You can and should choose a lender that gives you the freedom you need to work with any vendor (or vendors) that you choose. As you might expect, here at National Business Capital we impose no vendor restrictions of any kind. After all, it’s your business — not ours!

• You may have up to five years to pay back your loan

It’s not unusual for businesses to need well over a year before purchased equipment starts generating significant and sustainable ROI. The good news is that some lenders — including National Business Capital — offer equipment loans of up to five years in duration.

This may be a more realistic timeframe for you, plus it will reduce your monthly payment amount when compared to a shorter-term loan.

• You will qualify for a significant tax deduction

The interest on equipment loans is tax deductible, and in most cases, the IRS pegs this at 100 percent. What’s more, per the Section 179 tax deduction, you can deduct some or all of the equipment purchase price in the applicable in-service year.

Currently, the maximum allowable deduction is $500,000 (based on an equipment purchase maximum of $2,010,000).

You don’t need a long business history and excellent credit to apply for equipment loans. If you apply for an equipment loan from a bank and you haven’t been operating for at least two years and don’t have excellent business and personal credit scores, then your chances of obtaining funding are zero.

However, at National Business Capital, we’re more interested in what a business owner is doing now and has planned for the future than what has transpired in the past.

That’s why we can work with companies that have a few months of operational history. Impairment in personal business and/or credit scores is not a deal-breaker (and neither is a discharged bankruptcy or open tax lien).

Applying for Equipment Loans With National Business Capital

If you are looking to leverage the benefits of equipment loans, look no further than National Business Capital. With a single application, you can access exclusive offers from our diverse lender platform so you can make the best decision for your business.

With $2+ billion financed since 2007, multiple awards, and an experienced team of Business Finance Advisors, we have everything you need to find the best financing options for your project.

Are you ready to get started? Apply here.

FAQ

How much can I borrow for equipment?

The amount you can borrow for equipment depends on factors like your creditworthiness, the lender’s policies, and the cost of the equipment. Typically, loans range from a few thousand to several million dollars, covering most equipment needs for businesses of varying sizes and industries.

Lenders assess your financials to determine the appropriate loan amount based on your ability to repay.

Do I need collateral to secure an equipment loan?

Collateral requirements for equipment loans vary by lender. In many cases, the equipment being financed serves as its own collateral, meaning if you default on the loan, the lender can seize the equipment. This reduces the need for additional collateral but ensures the lender has security.

However, some lenders may require additional collateral, especially if the equipment’s value doesn’t fully cover the loan amount. It’s essential to clarify collateral requirements with your lender before proceeding with the loan application.

What are the eligibility requirements for equipment loans?

Eligibility for equipment loans typically depends on factors such as creditworthiness, business financials, and the specific lender’s criteria. Lenders may require a minimum credit score, stable revenue, and operational history.

Additionally, they assess the equipment’s value and the borrower’s ability to repay the loan. Meeting these requirements increases the likelihood of loan approval.

How long does the approval process take?

The approval process for equipment loans can vary depending on factors such as the lender’s efficiency and the complexity of the application. In some cases, approval may take as little as a few days, especially with alternative lenders offering streamlined processes.

However, traditional banks or SBA lenders may require several weeks for thorough evaluation and approval, particularly for larger loan amounts. Providing complete and accurate documentation can expedite the process.

Are there tax benefits associated with equipment loans?

Yes, equipment loans offer tax benefits for businesses. Interest payments on equipment loans are typically tax-deductible, reducing the business’s overall tax liability. Additionally, businesses can depreciate the equipment’s value over time, further lowering taxable income.

These tax advantages help businesses save money and improve their cash flow. However, it’s essential to consult with a tax professional to ensure compliance with tax laws and maximize these benefits.

Can I use the equipment loan for other business expenses?

Typically, equipment loans are earmarked specifically for purchasing equipment. Using the funds for other expenses may breach the loan agreement and jeopardize the loan’s terms. Adhering to the loan’s intended purpose is crucial to maintaining compliance and avoiding potential penalties or legal issues.