An Introduction to Equipment Loans: 5 Things You Need to Know
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!
First of all: yes, equipment loans are indeed used for purchasing equipment. But there are several other types of financing solutions that 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:
Equipment loans typically costs less than other types of business financing.
Equipment loans are secured by the equipment that will be purchased with the 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 case 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.
If you apply for an equipment loan from a bank and you haven’t been operating for at least two years, and if you 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 vs. what has transpired in the past. That’s why we can work with companies who have a few months of operational history plus impaired personal business and/or credit scores are not a deal-breaker (and neither is a discharged bankruptcy or open tax lien).
Looking For More Opportunities to Grow Your Business?
Using an equipment loan to buy new machinery for your business is a great way to take advantage of larger contracts, update your technology and increase your capacity! If you want to take your business to the next level with opportunities like improving your equipment, check out our latest eBook “7 Profitable Opportunities You Could Miss Without More Business Funding” today: