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What is Equipment Financing and How Does it Work?

Learn what equipment financing is, how it works, equipment financing options, and the benefits of equipment financing.

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If you’re starting a business, you may have to spend a lot of money on equipment – possibly between $10,000 and $125,000

And established businesses need equipment, as well. For example, a restaurant owner might buy a new oven because the old one stopped working and cannot be repaired. Or maybe the oven is needed for a new location.

As a small business owner, you might not want to exhaust your cash position to purchase equipment. Enter equipment financing.

What is Equipment Financing?

Equipment financing refers to a loan used to purchase business equipment. Computers, furniture, vehicles, and refrigerators are a few examples of business equipment. 

How Does Equipment Financing Work?

You can get equipment financing from a commercial bank, online lender, or government agency, to name a few common sources.

The process is different depending on the lender. With a commercial bank or government agency, you may have to provide several documents and wait a long time for approval and funding. With an online lender, on the other hand, a simple application and fast funding aren’t out of the ordinary.

Equipment Financing Options

Here are five equipment financing options:

Equipment Loan

An equipment loan is a common equipment financing option.

The term of an equipment loan is often the same or shorter than the useful life of the equipment. This serves two purposes:

  1. Prevents the borrower from making payments after the equipment is no longer useful.
  2. Makes the lender comfortable with using the equipment as collateral for the loan.

As with other types of loans, lenders evaluate borrowers based on credit score, time in business, and company financials.

In some cases, you can finance 100% – or close to 100% – of the purchase price with an equipment loan.

Term Loan

Here’s how a term loan works: the lender provides the borrower with funds to be repaid on a predetermined schedule. The repayment period can be short (one year) or long (25+ years).

One benefit of using a term loan is flexibility; you can use one loan for several reasons, such as buying equipment, increasing your working capital, and developing a new product.

That said, you need a good credit score to qualify for a term loan and some lenders have minimum loan amounts. So, a term loan may not be a viable option for new small business owners.

Business Credit Card

It goes without saying: you don’t want credit card debt. Many small businesses have been impacted by the sky-high annual percentage rates (APRs).

But it is possible to use a business credit card to improve your cash position for several months… without putting your business at risk. You just need a card with a 0% APR introductory period.

Of course, you want to be confident in your ability to end the no interest period with a zero balance.

Also, you may not be able to find a business credit card with a high limit, so if you’re in the market for a $250,000 piece of equipment, you may want to look at other financing options.

Merchant Cash Advance (MCA)

A merchant cash advance (MCA) provides a business owner with a cash advance, and the lender deducts a percentage of credit card transactions (often 10-20%) to recoup the original amount plus fees.

To calculate the amount to be repaid, you multiply the cash advance amount by a factor rate (usually between 1.1 and 1.5). (MCAs don’t have interest rates.)

MCAs have high APRs, but the adjustable repayment structure is valuable in unpredictable times.

Small Business Administration (SBA) Loan

The 7(a) Loan Program, by the Small Business Administration (SBA), is a way for small business owners to finance equipment.  

The SBA guarantees 75% or more of the loan in many cases. This reduces the risk on the lender’s side, giving small business owners better access to financing.

To qualify for a 7(a) loan, a business needs to have reasonable invested equity, a demonstrable need for a loan, and have already used alternative financial resources before looking for financial assistance – among other conditions

With a maximum loan amount of $5 million, the 7(a) loan can cover a high percentage of small business owners.

But here’s the bad news: you might have to wait months to get approved for an SBA loan, so it’s a non-starter if you need an immediate replacement for your old equipment.

Benefits of Equipment Financing

Here are three benefits of financing your equipment:

Maintain Working Capital 

As a small business owner, working capital is needed to fund your day-to-day operational needs. So, maintaining a good working capital ratio is critical for your small business. 

With a loan, you can buy equipment with little or no upfront investment. This frees up cash, allowing you to keep paying the bills – and potentially pounce on other opportunities.

Use the Equipment as Collateral

Isn’t the need to offer collateral a negative?

Well, it depends how you look at it.

If the equipment itself is the only collateral required by the lender, you aren’t putting other assets at risk.

And if you default on the loan, the lender gets the equipment and can recoup losses. So, the lender may offer more attractive terms due to the reduced risk.

Get Quick and Easy Financing

You no longer have to wait weeks – or months – to get financing from a lender. With cutting-edge lenders, now you can get secure financing in days.

Sure, you might be able to wait around for equipment financing in some situations. But what if a crucial piece of equipment unexpectedly breaks, and every day without a replacement is costly to your small business?

The Bottom Line

Your business equipment needs are non-negotiable – if you need equipment, you need equipment.

So, the question is how to acquire that equipment. The answer is going to be different – not only depending on your small business, but also depending on the type of equipment.

You might want to spread out the cost of an expensive piece of equipment over several years. 

But what if you want to buy a relatively inexpensive piece of equipment? And you expect to have no problem repaying the funds in a few months?

In that case, consider Gravity Capital – a quick and easy funding solution. With Gravity Capital Lite, for example, Gravity merchants can access up to $50,000 in financing with a soft credit pull.

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