Equipment Line of Credit
From machinery and computers to vehicles and real estate, you can leverage the value of your business assets for flexible access to capital.
An equipment line of credit is a revolving credit facility specifically designed for businesses to finance their equipment needs. It offers flexibility, allowing businesses to draw, repay, and redraw funds for equipment purchases as needed.
A business equipment line of credit is a strategic financial tool for businesses that frequently upgrade or replace equipment. Unlike a term loan that provides a lump sum of money, an equipment line of credit offers a limit up to which a business can borrow. This flexible access to capital enables businesses to manage cash flow more effectively, making it possible to fund equipment purchases without disrupting operational budgets.
This financing option can also cover repair and maintenance costs, further easing the financial strain on businesses. With the capacity to address unexpected equipment-related expenses, businesses can maintain uninterrupted operations, fostering improved productivity and profitability.
What Is an Equipment Line of Credit?
An equipment line of credit is a type of business financing that provides flexible access to capital for purchasing, repairing, or upgrading equipment. This revolving credit facility allows businesses to manage cash flow effectively and invest in necessary equipment without significant upfront costs.
A business equipment line of credit functions similarly to a business line of credit but is specifically geared toward equipment needs. The businesses have a credit limit that they can draw from as needed, which offers significant flexibility. This is especially valuable for businesses that have fluctuating equipment needs or for those that need to handle unexpected equipment-related expenses.
Pros and Cons of an Equipment Line of Credit
| Pros | Cons |
| Flexible Financing: An equipment line of credit provides flexibility to businesses, allowing them to draw funds as needed up to their approved limit. | Variable Interest Rates: Equipment lines of credit often have variable interest rates, meaning your payments could increase if rates rise. |
| Cash Flow Management: With the ability to tap into funds when necessary, businesses can better manage their cash flow. | Collateral Requirement: Most lenders require you to offer your purchased equipment as collateral, meaning it could be seized if you default. |
| Interest on Borrowed Amount Only: Unlike term loans, you only pay interest on the amount you’ve drawn from your line of credit. | Maintenance and Usage Requirements: Lenders might impose restrictions on the type of equipment you can purchase or require regular updates on its use. |
| Potential Tax Advantages: Interest paid on an equipment line of credit may be tax-deductible, lowering your business’s tax liability. | Possible Annual Fees: Some lenders charge an annual fee for maintaining the line of credit, increasing the overall cost. |
| Up-to-date Equipment: It allows your business to keep equipment up-to-date without significant upfront costs. | Not Ideal for Large Purchases: Equipment lines of credit might not cover the full cost of expensive equipment. |
Understanding Equipment Line of Credit Rates & Terms
Loan Amounts
$100,000 to $5,000,000
Interest Rates
9% to 25% on the amount drawn
Repayment Schedule
Revolving
Fees/Charges
Lender-specific
Equipment Line of Credit Rates & Terms Explained
When seeking a business equipment line of credit, it’s crucial to understand the variety of loan terms and features that can impact your business’s financial health. There are several key aspects to consider, including loan amounts, interest rates, repayment schedules, and associated fees or charges.
Loan Amounts
The loan amount refers to the total sum of money a lender is willing to provide for your business’s equipment needs. This amount is primarily determined by your business’s credit history, financial health, and the cost of the equipment. For equipment lines of credit, loan amounts typically range from $5,000 to $500,000 but can reach into the millions for larger, well-established businesses.
Interest Rates
Interest rates play a pivotal role in the total cost of borrowing. They are generally expressed as an annual percentage rate (APR) and may be either fixed or variable. Fixed rates remain constant over the life of the loan, while variable rates fluctuate based on market conditions. Interest rates for equipment lines of credit typically range from 10% to 25%.
Repayment Schedules
Repayment schedules define how often and in what amount you’ll make payments towards the loan. Business lines of credit are a bit different because most carry a “revolving” term, which means the financing technically has no end date. The borrower can draw and repay capital as needed until either they or the lender choose to end the contract.
Fees and Charges
There are a variety of fees and charges associated with equipment lines of credit. Some common ones include:
- Origination Fees: This one-time fee is charged by lenders for processing a new line of credit. It is usually a percentage of the total loan amount.
- Prepayment Penalties: Some lenders may charge a fee if you repay the loan earlier than the agreed-upon term, as they lose out on expected interest payments.
- Late Payment Fees: If a payment is not made by the due date, lenders may charge a late fee.
- Annual Fees: Some lenders charge an annual fee to keep the line of credit open.
- Draw Fees: Certain lenders may charge a fee each time you draw funds from your line of credit.
Every lender has unique costs and terms for financing. Working with multiple lenders to get the best rates and terms for your business equipment financing needs is recommended. Applying for a business equipment line of credit with National Business Capital allows your application to be reviewed by over 75 different lenders, resulting in saved time and money.
Who Needs Equipment Business Line of Credit?
An equipment business line of credit is a valuable financial tool for various types of businesses. This flexible lending option allows companies to access funds as needed for purchasing or upgrading equipment, which can be essential for growth and productivity. Several types of businesses and situations see an equipment line of credit as particularly beneficial.
Businesses that can benefit from an equipment line of credit include:
- Tech Companies: Regularly updating hardware, software, and other technical equipment is crucial to maintain a competitive edge in this industry.
- Medical Practices: Medical technology advances rapidly. To provide the best care, healthcare facilities often need to update or replace medical devices and equipment.
- Manufacturing Businesses: New machinery or equipment upgrades can lead to increased efficiency and production output.
- Landscaping Companies: These businesses may need to purchase equipment in the off-season to prepare for the busy months.
- Retail Stores: Retail businesses may need additional cash to stock up on inventory or upgrade POS systems ahead of peak shopping seasons.
- Restaurant Start-ups: New restaurants often require significant investment in kitchen equipment.
- Construction Start-ups: These businesses need a variety of costly equipment like excavators, cranes, and loaders.
- Transportation Companies: Businesses that rely on vehicles for delivery or transport services might need quick access to funds for vehicle repair or replacement.
- Factories: Factories heavily depend on their equipment for production, and any unexpected breakdowns can disrupt operations.
An equipment line of credit can be a vital financial tool for any business facing the need for equipment purchase, replacement, or upgrade. It provides flexibility, allowing businesses to draw funds as needed and repay at a pace that aligns with their revenue streams.
Equipment Line of Credit Vs Equipment Leasing
When it comes to financing business equipment, businesses have several options, including an equipment line of credit and equipment leasing. Both options have distinct characteristics and can offer different advantages depending on a business’s specific needs and circumstances.
| Criteria | Equipment Line of Credit | Equipment Leasing |
| Ownership | You own the equipment once it’s purchased. | You do not own the equipment; you’re essentially renting it for the term of the lease. |
| Flexibility | Provides flexibility to draw and repay funds as needed, up to a set credit limit. Ideal for ongoing or unpredictable equipment needs. | Less flexibility as lease terms are fixed, and payments must be made regardless of equipment use. |
| Upfront Cost | Usually requires a down payment. The amount can vary based on creditworthiness and loan terms. | Often requires less upfront cost than a loan, sometimes just the first and last month’s lease payments. |
| End of Term | Once the credit line is repaid, you can choose to continue using the equipment, sell it, or trade it in. | At the end of the lease, you can return the equipment, purchase it (if the lease includes a buyout option), or renew the lease. |
| Tax Implications | Interest payments are typically tax-deductible. Depreciation of the equipment can also be deducted. | Lease payments may be fully deductible as a business expense. |
| Maintenance | You are responsible for the maintenance and repair of the equipment. | Depending on the lease terms, the leasing company may be responsible for maintenance and repairs. |
The choice between an equipment line of credit and equipment leasing depends on the specific circumstances of your business, including your cash flow, tax situation, equipment needs, and long-term business plans.
Various Types of Equipment Lines of Credit
A business equipment line of credit is a flexible financing solution designed to help businesses manage their equipment needs. However, not all equipment lines of credit are the same. They come in various types to cater to different business needs and situations.
| Type of Financing | Description |
| Unsecured Line of Credit | An unsecured line of credit doesn’t require any collateral, making it a lower risk option for the borrower. However, these tend to have higher interest rates and stricter qualification requirements due to the increased risk for the lender. |
| Secured Line of Credit | A secured line of credit requires collateral, usually in the form of the equipment being purchased. This reduces the risk for the lender and typically results in lower interest rates. If the borrower defaults on the loan, the lender has the right to seize the collateral. |
| Revolving Line of Credit | A revolving line of credit allows borrowers to draw, repay, and redraw funds as needed, up to a set credit limit. This is ideal for businesses with ongoing or unpredictable equipment needs. |
| Non-Revolving Line of Credit | A non-revolving line of credit offers a one-time lump sum. Once repaid, the line of credit is closed, and to borrow again, the business must apply for a new line of credit. This is suitable for businesses with one-time, large-scale equipment purchases. |
| Seasonal Line of Credit | This type of line of credit is specifically designed to support businesses with seasonal needs. It offers flexibility to purchase equipment ahead of peak seasons and repay the credit when revenues are higher. |
How to Qualify for an Equipment Line of Credit?
Securing an equipment line of credit involves meeting certain eligibility criteria set by the lender. These requirements can vary significantly from one financial institution to another, but some commonly considered factors include:
- Credit Score: Your personal and business credit scores are a primary consideration for lenders. Higher scores indicate a lower risk of default, increasing your chances of approval and potentially securing better terms. Generally, a credit score of 680 or above is considered good, but some lenders may offer equipment lines of credit to borrowers with lower scores.
- Time in Business: Most lenders prefer businesses that have been in operation for a minimum period, often one to two years. A longer business history can indicate stability and predictability, reducing risk for the lender.
- Business Revenue: Lenders typically require evidence of regular and sufficient business revenue to ensure you can repay the loan. Minimum annual revenue requirements vary between lenders, but a general benchmark might be $50,000 to $100,000.
- Profitability: In addition to revenue, some lenders might assess your business’s profitability. They may want to see positive net income for at least one of the past two years.
- Industry: The industry you’re in can also influence your eligibility. Some lenders may be hesitant to lend to businesses in industries considered high risk or volatile.
- Use of Funds: You may need to specify how the line of credit will be used. For an equipment line of credit, the funds should primarily be used for purchasing or leasing equipment.
- Collateral: For secured lines of credit, you will need to provide collateral, typically the equipment you plan to purchase. This provides security for the lender in case of default.
Every lender has different criteria, and it’s always best to discuss these factors directly with potential lenders to understand their requirements fully. Ensure to have your financial documents in order, including tax returns, balance sheets, and cash flow statements, as these will likely be requested during the application process.
Equipment Line of Credit: How to Apply?
Applying for an equipment line of credit through National Business Capital (NBC) can be a streamlined process, offering businesses the advantage of accessing a variety of lending options through a single application. NBC’s approach not only saves business owners time, but also increases the chances of securing the most competitive loan terms.
To apply for an equipment line of credit, follow these five steps:
- Complete the Online Application: First, you’ll need to fill out NBC’s short online application. It’s designed to be quick and easy, generally taking less than 5 minutes to complete. You’ll be asked for basic information about your business and your financing needs.
- Connect with a Lending Specialist: After submitting your online application, you’ll be connected with a lending specialist from NBC. This expert will discuss your financing requirements and goals in more detail, helping you prepare your application effectively.
- Prepare Your Application: Your lending specialist will guide you through the process of gathering and preparing the necessary documents for your application. These might include business financial statements, tax returns, and details of the equipment you wish to finance.
- Submit Your Application: Once your application is ready, NBC will submit it to multiple lenders within their network of over 75 lending partners. This broad submission increases your chances of approval and helps to secure the most competitive interest rates and terms for your equipment line of credit.
- Select the Best Offer: Upon receiving offers from lenders, NBC will assist you in comparing and evaluating these options. Their team provides Return On Investment (ROI) guidance and strategies, helping you maximize the value of your financing.
National Business Capital aims to establish a long-term financing relationship with clients, assisting with future capital needs beyond the initial transaction. By leveraging their extensive lender marketplace and professional guidance, you can ensure that you’re not only getting a line of credit but also a strategic partner to support your business growth.
Frequently Asked Questions
How does an equipment line of credit differ from an equipment loan?
While both are used for financing equipment, an equipment line of credit offers flexibility to draw and repay funds as needed, up to the set credit limit. An equipment loan, on the other hand, provides a lump sum upfront, which is repaid over a fixed term.
Can I get an equipment line of credit with bad credit?
While having a high credit score improves your chances of approval and can secure better terms, some lenders may offer equipment lines of credit to borrowers with lower scores. These may come with higher interest rates and may require additional collateral.
Can I use an equipment line of credit for non-equipment expenses?
While an equipment line of credit is primarily designed for purchasing equipment, some lenders may allow it to be used for related expenses, such as installation, maintenance, and training. However, it’s best to confirm this with your lender.
Is collateral required for an equipment line of credit?
For a secured line of credit, collateral is required. This typically is the equipment being purchased, which can be seized by the lender in case of default. However, some lenders offer unsecured lines of credit, which don’t require collateral but generally come with higher interest rates.
Can startups qualify for an equipment line of credit?
While many lenders prefer businesses with a history of revenue and profitability, some lenders may offer equipment lines of credit to startups. These may require a strong personal credit score, a solid business plan, or collateral.
What happens if I exceed my equipment line of credit?
Exceeding your credit limit can result in additional fees and higher interest rates. It can also negatively impact your business credit score. It’s important to manage your line of credit responsibly and communicate with your lender if you anticipate exceeding your limit.
Are there any penalties for early repayment?
Some lenders may charge prepayment penalties to offset the loss of interest income, while others may not. Be sure to understand the terms of your agreement before making early repayments.
