Equipment Loan Advantages and Disadvantages

Buying equipment is an essential aspect of owning and operating a business for many entrepreneurs. However, the cost can range from tens to even hundreds of thousands of dollars, depending on the machinery you require.

Equipment loans are specifically intended to assist businesses in purchasing equipment, and they can help close the gap. It lowers upfront costs and reduces risk for the lender by using the equipment itself as collateral for the loan. Because equipment loans have built-in collateral, their eligibility requirements are typically more relaxed than those of other loans. Businesses with less than ideal credit or a short history of operation may be eligible.

In 2023, 13% of small business loan applications were for auto or equipment loans, and 73% of those applications were fully approved, according to the Federal Reserve Banks’ 2023 Small Business Credit Survey. Even though equipment loans can assist companies in buying necessary machinery or equipment, it’s essential to weigh the benefits and drawbacks of these loans before committing.

Examine the benefits and drawbacks of equipment loans.

Pros

• Accessible with ease
• Quick funding
• No requirement for extra security
• Offers flexible financing
• Develop credit

Cons

• Restricted to financing equipment
• Possibly needing a down payment
• The loan could last longer than the equipment life

Benefits of equipment loans

There are many benefits to using an equipment loan if you need to buy equipment for your business.

• Accessible with ease

One popular type of loan that is available from numerous banks and lenders is an equipment loan. It usually has loose qualifying standards, so even if your company is just getting started or your credit isn’t the best, you can still easily get one. It is also possible to obtain an equipment loan for a variety of equipment, irrespective of the sector in which your company operates.

• Quick funding

Equipment loans are readily funded by many lenders, particularly if you choose an online lender. Funds could be available to you in as little as 24 hours.

• No requirement for extra security

Your business doesn’t need any extra assets to be eligible for an equipment loan. The equipment you purchase acts as the security.

• Offers flexible financing

By using equipment financing, you can avoid needing to use a significant amount of cash upfront to buy equipment. By using a loan, you can spread the expense throughout the three to ten-year loan. You pay more interest overall the longer the repayment period is. However, longer terms may result in more manageable monthly payments.

• Develop credit

Any type of loan can help your business establish credit, but one of the simplest ways to get started is with an equipment loan. Even if your business has no prior experience operating, they are typically simple to qualify for. Just make sure to confirm whether the lender reports to business or personal credit bureaus and whether they report your loan activity to those as well.

Drawbacks of equipment financing

Before applying for an equipment loan, you must weigh the disadvantages.

• Restricted to financing equipment

Equipment financing is not widely used. It can only be used for equipment that the lender certifies is suitable to be used as collateral, including equipment that you buy, lease, or repair. For other needs, you will require different kinds of loans.

• Possibly needing a down payment

A down payment of up to 20% of the equipment’s cost is often required for equipment loans. If you’re purchasing an expensive item, you might need a large down payment or you might need to consider leasing if you can’t afford it.

• The loan could last longer than the equipment life

If you take out a long-term loan, there’s a chance that the loan will outlive the equipment you buy. For example, you might be forced to pay back a 15-year loan for something you can’t use for another five years if the equipment breaks down after ten years.

It might wear out, lose some of its functionality, or become outdated even if it doesn’t break. Make sure everything you purchase with a long-term loan has a long lifespan.

How can you decide if you should take out an equipment loan?

If your business needs to finance equipment and you want to pay for it as cheaply as possible overall, then an equipment loan makes sense. You have to be willing to use the equipment as collateral because it is the loan’s security.

You might be better off with other business loans, such as an unsecured term loan if you don’t want to use the equipment as collateral. You might be able to use a business line of credit in place of cash for very small equipment purchases. However, you might consider alternative financing options like a merchant cash advance if your credit isn’t that great—for example, if your personal credit score is 500.

Is financing equipment a good idea?

Depending on how much capital your business has and how much you’re willing to give up for equipment purchases, you may choose to finance your equipment purchase.

By paying off the equipment gradually, many businesses use equipment loans to help them maintain capital and cash flow within their operations. However, if you have a lot of money, you could purchase the equipment outright and avoid paying interest.

Conclusion

Equipment financing is readily available and adaptable, catering even to startups and businesses with credit issues. To make sure you receive the best deal and the lowest fees, shop around and compare equipment loans from a few different providers. To be sure you’re making the right decision, you can also compare equipment loans with other best loans available.