Buying business equipment is a major investment – whether purchasing it for the first time or upgrading from years of service. While equipment is necessary for some, figuring out how to pay for said equipment takes time. Small business owners should consider getting a term loan, specialized equipment loan, small business lines of credit or small business credit card to achieve this goal.
Benefits of Financing Business Equipment
Bernardo Martinez, managing director at Funding Circle U.S., said that financing allows small businesses ‘to preserve their working capital for other strategic purposes, and in some cases, the equipment may even help generate new revenue for the business that could help offset the costs of financing.”
Financing also helpa businesses acquire the most up-to-date equipment available to be competitive.
A term loan lends a lump sum of cash to be repaid over a set period of time at a fixed or variable interest rate. The fixed repayment schedule can make managing cash flow easier while balancing other capital needs. A term loan can be quickly available for qualified borrowers and can also be used for other expenses aside from the purchase of business equipment.
Specialized Equipment Loans
Equipment loans are as the name suggests, to be exclusively used to purchase equipment for businesses and are usually offered by banks and online lenders. Equipment loans are repayable over a fixed term and most closely resemble term loans except that the piece of equipment purchased serves as the collateral. So, if the borrower can no longer pay, the lender will repossess the equipment.
Since there is collateral, this type of loan has ‘lower interest rates, a greater amount of credit and longer transaction terms, versus other methods of financing,” says Tom Ware, PayNet Inc’s senior vice president of analytics and product development.
Another advantage of collateral-backed equipment loans is that the owner of a newer business or a person who has a lower credit score may qualify.
Business Line of Credit
Business lines of credit allow business owners to draw against their available credit. It has variable rather than fixed annual percentage rates (APR) and collateral isn’t required for unsecured lines of credit. The funds can be used not only to buy equipment but also for other business expenses.
SBA Loan Guarantees
A Small Business Administration (SBA) guarantee means that the SBA promises to pay back a portion of the loan if the business owner can’t, reducing the risk for a lender and potentially making loan qualification easier for businesses. SBA loans set generous borrowing caps of up to $5.5 million and longer payment terms that could be up to 20 years.
To qualify for an SBA loan, borrowers must meet specific guidelines or requirements. SBA’s lending partners typically have their own set of requirements for approval, in addition to basic SBA requirements.
Business Credit Cards
Business credit cards are another equipment financing option that is more suited for short-term working capital needs in smaller equipment purchases, such as new computer hardware or software.
Credit cards can have higher interest rates than equipment loans and the loan amount is usually significantly less. Credit cards are the better approach for smaller amounts and much easier with quicker funding.
In whatever type of financing, it is important that the borrower understands the fees, interest, penalties and repayment terms before signing on the dotted line.