Equipment term loans provide entrepreneurs with the funds to complete equipment transactions without jeopardizing their cash flow. They provide a set amount of capital, usually the total purchase amount, that’s repaid over an agreed-upon period of up to 5 years.
The cost of equipment often stands as a hurdle between businesses and their full potential, but equipment term loans allow entrepreneurs to spread a sizable investment over a more manageable schedule. Once the transaction is finalized, you can start using your equipment and set your plans into motion.
You can secure equipment loans from banks, credit unions, non-bank lenders, and marketplaces, which combine multiple lenders into one centralized location. Continue reading for everything you need to know about equipment term loans in 2023 and beyond.
What Is an Equipment Term Loan?
Equipment term loans provide businesses with a lump sum of capital to purchase equipment, with the borrower making regular payments toward the outstanding amount throughout the term. Although repayment is flexible, most equipment loans are long-term (up to 5 years).
You can leverage this type of financing for almost any business equipment, including machinery, kitchen appliances, CRM software, vehicles, computers, and specialized equipment, like printing machines and medical tools. Unlike a lease, where you return your equipment to the vendor at the end of the term, equipment loans allow the borrower to maintain ownership of the equipment once it’s paid in full.
Much like other forms of financing, you’ll need to meet a lender’s minimum eligibility criteria before they’ll approve your application and help you purchase equipment. These qualifications differ from lender to lender, but in general, banks and credit unions uphold more stringent criteria than non-bank lenders.
How Do Equipment Term Loans Work?
Depending on the lender you’re dealing with, the process can go two ways: You receive the funds and pay the equipment vendor yourself, or the lender pays the vendor directly, who then provides you with the equipment. In either case, you’re able to start using the equipment you’ve purchased immediately, and you maintain ownership of the asset after you’ve fully paid it off.
Much like a traditional term loan, borrowers make regular payments to their lender over the course of their term, with each installment working towards the principal and interest. Equipment loans generally feature fixed interest rates, so borrowers can benefit from static payment schedules throughout their financing.
The equipment you’re looking to purchase serves as collateral for the financing, so there’s no need to offer another asset. Overall, equipment loans are a great resource for growing entrepreneurs seeking to add new assets to their balance sheets, increase their efficiency, and enter a new period in their business history.
How an Equipment Term Loan Can Benefit Your Business Operations
Equipment loans accelerate your growth by bridging the capital gap and making equipment more attainable at all stages of your business process. Instead of waiting for the “right time” to make the investment you’ve had your eye on, you can set your plans into motion quickly and manage the costs over time.
Here are a few of the many benefits of equipment loans for growing businesses.
- Increased Purchasing Power: Equipment purchases that would previously have been out of your financial capability become feasible with the help of equipment loans. The funds complement your income and, in turn, allow you to purchase a higher caliber of equipment.
- Preserve Cash Flow: Making a sizable investment from your cash flow leaves you without liquidity for other opportunities. With an equipment loan, you can secure the equipment you need without worrying about having enough cash on hand for what’s around the corner.
- Efficiency and Productivity: You no longer need to operate below your highest capacity. Equipment loans put the equipment you need within reach and, more importantly, allow you to start leveraging the equipment in your business immediately.
- Tax Advantages: Financing a purchase instead of buying it outright can yield tax benefits under specific circumstances. One of which, Section 179, allows you to write off nearly the entire value of an asset purchase in the current year’s tax return instead of breaking that number down across 5 years.
- Enhanced Forecasting: Since interest rates remain static throughout the term of your loan, you can forecast the future with increased accuracy. You’ll know exactly how much you’ll have to pay, when you have to pay it, and how long until you’re debt-free, which allows you to make plans around your payments without worrying about an unexpected change.
Discover Equipment Term Loan Rates, Terms, & Amounts
Rates
Will depend on your business, the lender you're working with, and the economic conditions surrounding your transaction.
Terms
Generally long term, but align with the lifetime of the equipment you're looking to purchase.
Amounts
High funding amounts to allow for any equipment purchase
Understanding the Various Types of Equipment Term Loans
Equipment loans come in two main formats: short-term and long-term. The shift in repayment schedule means more than a few extra payments, so let’s explore the ins and outs of each option.
| Type of Financing | Description |
| Short-Term Equipment Financing | Short-term equipment financing comes with repayment schedules of one year or less. They’re reserved for situations where the equipment will drive revenue that covers or exceeds the cost of the financing, as well as scenarios where the equipment you’re looking to purchase has a relatively short lifecycle.
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| Long-Term Equipment Financing | On the other hand, long-term equipment financing is standard. Repayment terms extend up to 5 years for borrowers, which gives them more than enough time to pay off the equipment in full.
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The repayment schedule of an equipment term loan generally follows the lifetime of the equipment itself. If the equipment won’t last long, then it makes sense to opt for a shorter term because you definitely won’t want to continue paying for equipment you’re no longer using.
Equipment Financing: What Types of Equipment Can Be Funded with a Term Loan?
Equipment loans are used for almost any type of business equipment, including but not limited to
- Machinery: Construction, manufacturing, agriculture, and other industries that rely on heavy machinery can preserve their cash flow and secure the equipment they need simultaneously with an equipment term loan.
- Kitchen Equipment: Kitchen appliances, like ovens, refrigerators, and freezers, all fall under this category. Restaurants and hospitality businesses can quickly and easily secure the equipment they need to operate at their highest capacity with the right lender behind them.
- CRM Software: Businesses can finance software, like Salesforce and Hubspot, using equipment financing. Although it may take some time to get used to, leveraging CRM software can significantly improve your business processes.
- Office Furniture: A business planning to make a move to a new office should consider financing the furniture in their new space. After an already costly move, preserving your cash flow instead of purchasing the furniture outright can help make the transition financially easier.
- Specialized Equipment: Some businesses require specialized equipment to conduct their work, but the cost of these assets can reach hundreds of thousands of dollars – if not millions. An equipment loan not only allows you to break the cost over a more manageable schedule, but it also allows you to take a leap to the forefront of your industry and compete with the big players.
There are many other types of equipment that can be financed. If you have a question about a specific piece of equipment for your business, reach out to the expert Business Finance Advisors at National Business Capital and learn your options.
What Do You Need to Qualify for an Equipment Term Loan?
1+ Year in Business
$120,000 in Annual Revenue
580+ Credit Score
Steps to Apply for an Equipment Term Loan
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1.Apply Securely Within Minutes
Move through our streamlined application within minutes and upload your business documents with zero risk.
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2.Review Your Offers
Compare your offers with expert advice from our team and select the best one for your specific circumstances.
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3.Get Funded
With your money in hand, you can take advantage of opportunities and tackle challenges with confidence.
Frequently Asked Questions
What factors are considered when determining the interest rate for an equipment term loan?
The interest rate on your financing depends on numerous factors, including the financial background of your business, the lender you’re working with, and the economic conditions surrounding your transaction.
Businesses with less than favorable financials will have difficulty reaching an approval altogether, but the lender’s eligibility requirements and stance on your business/industry also play a major role. Interest rates will also increase in times of economic uncertainty, so you’re more likely to receive a higher rate if you apply during a slowdown than you would during a booming economy.
Are there any upfront costs or fees associated with an equipment term loan?
Most lenders impose fees of some kind on borrowers during the financing process. The specifics will vary depending on the lender you’re working with, so it’s important to ask these questions upfront to avoid running into challenges down the line.
Can I get an equipment term loan if I have bad credit?
Yes! Some lenders don’t uphold credit score requirements, meaning businesses with little to no credit history (or bad credit) can secure the equipment they need. However, the lack of a credit score requirement opens up a world of risk for the lender, so they’ll offer higher interest rates as a method of controlling their risk.
Can I use an equipment term loan to purchase used equipment?
Yes, and that’s usually the preferred method. Used equipment comes at a cheaper price than an entirely new model, so entrepreneurs will finance it and complement their savings with a prolonged repayment schedule.
How much money can I borrow with an equipment term loan?
The funding amount of an equipment term loan correlates to the equipment you’re looking to purchase and the creditworthiness of your business. A lender will review your contract and, if it makes sense, approve your business for the equipment you’re looking to purchase.
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