Table of contents
Updated on April 17th. 2024
At first glance, an article that covers the basics of equipment loans may seem rather pointless. After all, aren’t equipment loans used for purchasing equipment? Well, the answer may surprise you and help you understand why there’s more to the story!
At first glance, an article that covers the basics of equipment loans may seem rather pointless. After all, aren’t equipment loans used for purchasing equipment? Well, the answer may surprise you and help you understand why there’s more to the story!
The short answer is yes, equipment loans are indeed used for purchasing equipment. However, several other types of financing solutions can also be used to buy equipment, such as working capital loans, business lines of credit, invoice financing (a.k.a. factoring), and merchant cash advances.
However, unlike those solutions, equipment loans are structured differently — and that’s why understanding how they work is important and valuable if you choose to head in that direction.
Here are the 5 key things that you need to know - but before that, let’s get a better understanding of what equipment loans exactly are:
What Are Equipment Loans?
Equipment loans, also known as equipment financing, are a type of financing specifically designed for the purchase of machinery, tools, vehicles, or technology needed for day-to-day operations. In most cases, the equipment itself serves as collateral, aka it provides a guarantee for the lender against defaulting.
Repayment terms vary but typically match the expected lifespan of the equipment, which can range from a few years to a decade. Interest rates may be fixed or variable, and you can choose between leasing options or traditional loans depending on your preferences and financial circumstances.
Overall, equipment loans offer businesses a convenient way to acquire necessary assets while preserving cash flow.
What Are Equipment Loans Used For?
While other types of financing have broader purposes, equipment loans have a very specific purpose: the purchase of equipment.
Let’s take a look at what types of equipment you can acquire with this form of financing:
- Purchasing machinery
- Acquiring tools and equipment
- Buying vehicles
- Investing in technology
- Obtaining furniture and fixtures
- Upgrading outdated equipment
- Expanding production capacity
- Improving operational efficiency
- Staying competitive in the market
Put simply, if your business requires a significant investment in a physical asset, an equipment loan allows you to divide the cost into affordable installments spread over time.
What Are The Benefits of Equipment Loans?
Equipment loans come with multiple benefits for businesses, providing a convenient and efficient means to acquire essential assets while supporting growth and operational efficiency. Some of them include:
- Capital preservation - this type of financing allows you to preserve cash flow by spreading the cost of equipment over time
- Improved cash flow - instead of losing potential liquidity by providing large upfront payments for equipment, you can maintain your liquidity with equipment loans.
- Ownership - when you take out an equipment loan, the lender purchases it on your behalf, and you become the owner once the loan has been paid.
- Tax benefits - Purchasing equipment for your business also qualifies you for tax deductions on interest payments and equipment depreciation.
- Up-to-date technology - this type of financing enables businesses to stay competitive by investing in the latest equipment and technology.
- Flexible terms - equipment loans provide a lot of flexibility when it comes to repayment terms, as they are tailored to your financial situation.
- Asset security - this financing option means that you can use the purchased equipment as collateral, reducing the need for additional security.
Things You Need to Know About Equipment Loans
• Equipment loans typically cost less than other types of business financing.
Equipment loans are secured by the equipment that will be purchased with cash (similar to how car financing companies often use the financed vehicle as collateral). This reduces the lender’s risk, and translates into a lower cost of borrowing vs. unsecured business funding products.
• You should retain the right to choose the vendor you want
Some lenders that offer equipment loans oblige borrowers to choose from a limited pool of vendors. Be assured this is by no means a legal requirement, nor is it in your interest.
You can and should choose a lender that gives you the freedom you need to work with any vendor (or vendors) that you choose. As you might expect, here at National Business Capital we impose no vendor restrictions of any kind. After all, it’s your business — not ours!
• You may have up to five years to pay back your loan
It’s not unusual for businesses to need well over a year before purchased equipment starts generating significant and sustainable ROI. The good news is that some lenders — including National Business Capital — offer equipment loans of up to five years in duration.
This may be a more realistic timeframe for you, plus it will reduce your monthly payment amount when compared to a shorter-term loan.
• You will qualify for a significant tax deduction
The interest on equipment loans is tax deductible, and in most cases, the IRS pegs this at 100 percent. What’s more, per the Section 179 tax deduction, you can deduct some or all of the equipment purchase price in the applicable in-service year.
Currently, the maximum allowable deduction is $500,000 (based on an equipment purchase maximum of $2,010,000).
You don’t need a long business history and excellent credit to apply for equipment loans. If you apply for an equipment loan from a bank and you haven’t been operating for at least two years and don’t have excellent business and personal credit scores, then your chances of obtaining funding are zero.
However, at National Business Capital, we’re more interested in what a business owner is doing now and has planned for the future than what has transpired in the past.
That’s why we can work with companies that have a few months of operational history. Impairment in personal business and/or credit scores is not a deal-breaker (and neither is a discharged bankruptcy or open tax lien).
Applying for Equipment Loans With National Business Capital
If you are looking to leverage the benefits of equipment loans, look no further than National Business Capital. With a single application, you can access exclusive offers from our diverse lender platform so you can make the best decision for your business.
With $2+ billion financed since 2007, multiple awards, and an experienced team of Business Finance Advisors, we have everything you need to find the best financing options for your project.
Are you ready to get started? Apply here.
ABOUT THE AUTHOR
Joe Camberato is the CEO and Founder of National Business Capital. Beginning in 2007 out of a spare bedroom, Joe and his team have financed $2+ billion for businesses nationwide. He’s made it his calling to deliver the educational and financial resources businesses need to thrive.
