How to choose the best equipment loan
Key takeaways
Equipment loans allow businesses to purchase most equipment, like semi-trucks or POS machines
Buying equipment instead of leasing gives your business a chance to add a valuable asset to your portfolio
You should compare terms to find the best equipment financing, including interest rates and payment schedules
Quality equipment isn’t cheap, and acquiring it can be a big barrier to launching or expanding a business. An equipment loan breaks down the total cost into smaller payments.
To choose the best equipment loan for your business, compare lenders by reviewing types of equipment loans, interest rates, fees and repayment terms and make an informed decision.
1. Assess your business’s needs
Companies use equipment loans to purchase everything from computers to semi-trucks to point-of-sale systems. To avoid spending too much on your equipment purchase, assess your business needs by figuring out what type of equipment you need, how you will use it and what equipment options are available.
Used equipment can often get the job done for a much lower cost.
2. Decide on a type of equipment financing
Each type of equipment financing option has its benefits and drawbacks. As you explore, consider the specific needs of your business, as well as its finances.
Equipment loans: Equipment loans give business owners the opportunity to purchase equipment outright. They are secured term loans that borrowers pay off over a term of six months to ten years. Until the loan is repaid, you may lose the equipment if you default. After all payments are made, the borrower owns the equipment.
Equipment leasing: Equipment leasing allows you to rent equipment for a specified period. In exchange, you agree to pay a set amount until the end of the lease term. If you want to rent for a longer period, this could be the way to go. You may spend less than what you would on an equipment purchase. But if you think you may want to purchase the equipment at the lease’s end, make sure that is an option with your chosen lender.
Sale-leaseback: With this equipment financing option, business owners sell their equipment to a lender and then lease it. Businesses can have a lot of money tied up in equipment, but if they sell, they can free up cash and create working capital. They’ll be able to cover lease payments and use the leftover cash for other business expenses.
3. Assess your business’s qualifications
Both online and traditional lenders have loan requirements borrowers must meet to be approved for a loan. Factors that impact loan approval include business or personal credit score, annual revenue, time in business, and collateral. Depending on where you choose to apply, requirements will differ.
For example, online lenders tend to be flexible and open to lending to startups, while traditional lenders have more stringent lending requirements that only established businesses can meet.
Because the equipment acts as collateral to secure the loan, lenders are less worried about losing money if a borrower defaults. That means lenders often set lower requirements for equipment loans than other loan types — you should be able to qualify with a credit score in the 600s.
4. Look for lenders
If you’ve reviewed your business qualifications, you should have a good idea of which type of lender would be a good fit for your business. Equipment loans are available through banks, credit unions, and online lenders.
Lenders specializing in equipment loans — such as semi-truck loans — may seem the most convenient, as they tend to offer an expedited loan process. But look out for high fees and interest rates.
Bankrate insight
Some of the best equipment loans don’t require a high credit score or a long time in business. Explore options from:
5. Compare your options
Once you compile a list of potential lenders, compare your options. If your lenders offer a way to prequalify with a soft credit pull, make sure to use it. This will let you compare rates and amounts without hurting your credit score.
Loan amount: The loan amount varies by lender, but expect it to cover between 80 and 125 percent of the vehicle’s cost. Some lenders offer loan amounts above 100 percent to cover soft costs, such as shipping or installation.
Down payment: The loan may require a down payment between 10 and 20 percent. The amount depends on the lender, and you may be able to negotiate the percentage.
Interest rate: Both your business’s creditworthiness and current market forces impact business loan interest rates. Rates range from the single digits to well over 30 percent.
Fees: Common business loan fees include administrative, annual, application, late and origination fees. Some fees are flat, but others may equal a percentage of the loan amount, tacking on thousands in added costs.
Repayment terms: Repayment terms range from six months to 10 years, and lenders may offer multiple options for payment frequency — monthly, quarterly, semi-annual or annual payments.
Preapproval period: Lenders understand the importance of choosing the best equipment for your business, so they’ll give you a bit of time to shop around and find the best deal. Triton Capital, for example, gives borrowers a preapproval period of up to 90 days to find equipment.
Payment reporting: Equipment loans can help you build your business credit score if you make on-time payments, so confirm with each lender if payments are reported to any credit bureaus, such as Dun & Bradstreet, Equifax or Experian.
Bankrate insight
The loan amount, interest rate, and loan term impact your total cost of borrowing. If you want to know which loan option is the most affordable, the Bankrate business loan calculator can help you compare loan costs from different lenders.
6. Apply for the best equipment financing
Once you choose the best option, gather your business documentation and submit the loan application.
Typically, you’ll be asked to provide your business license and registration, legal documents and financial documents, like bank statements and tax returns. To ensure seamless and timely processing of your application, ask the lender what’s needed before applying.
Bottom line
An equipment loan can help your business get essential equipment without draining your savings or maxing out a credit card. But before signing any contract, compare multiple loan offers to make sure you’re getting the best terms. If you need money fast, an online lender may be the best option, but traditional banks often have more competitive rates.
Frequently asked questions about the best equipment financing
What is the average rate for equipment loans?
An equipment loan can have interest rates anywhere from about 5 percent to 35 percent. Your rate will depend on factors like the size of your down payment, credit history, time in business, and business revenue. The best equipment loan rates are usually reserved for established businesses that have strong credit scores and high annual revenues.
What type of loan is an equipment loan?
An equipment loan is a term loan. You will get funds in a lump sum and pay it back on a monthly schedule, usually over several years. If you go into default the bank can seize your equipment to recoup their funds.
Which loan is best for business?
The best loan for your business depends on what you need it for. Equipment loans, for instance, are good for businesses that need to obtain an essential asset to keep their operation up and running. Lines of credit and term loans may also be good for everything from emergency funds to working capital.
