What Is Equipment Loan?
An equipment loan – as the name suggests – is a type of financing that enables small business owners to get money to purchase equipment when they don’t have enough cash.
How does Equipment Loan Work?
Unlike traditional loans, collateral isn’t necessary to get an equipment loan. While this makes it attractive, most lenders usually choose to seize the item bought with the loan in the event that the borrower is unable to pay the loan. This makes it very easy to get an equipment loan because the lender can easily repossess the item if there’s no payback. Also, new equipment usually translates to more revenue, so it’s almost always a safe bet to give out an equipment loan.
There are a variety of agencies for getting an equipment loan, ranging from traditional banks to specialized lending organizations. The terms of the loan differ depending on who you’re dealing with. Usually, the lender requires the small business owner to finance a down payment of around 10-30% of the entire cost; then the lender pays the rest. There is subsequently an agreed upon time during which the lender expects the loan to be paid back in installments.
Who Is Eligible For an Equipment Loan?
Pretty much any small business (usually classified as a Small or Medium Enterprise (SME)) is eligible for an equipment loan.
How to Obtain Equipment Loan?
As stated earlier there are different organizations from which you can obtain an equipment loan – and they all have different standards for giving out a loan. Some will require your business to have been running for a certain number of years, others will require your revenue to exceed a certain amount and so on.
Generally, a business that isn’t a credit risk and has a strategic business plan is often going to get the loan approved. It is important to have proper documentation of the business accounts or statement sheet to show the lender that your business can pay back the loan. Also, a good business plan is needed to show where you’re heading, especially with the purchase of the new equipment.
The Advantages and Disadvantages of Equipment Loan
First of all, they get approved (or denied) quickly. Secondly, because the money is coming from elsewhere – and the equipment is likely to generate more revenue – equipment loans are a safe means of raising new capital. Thirdly, they enable you to keep much-needed cash in your pocket. If an oven gets broken at a bakery, for instance, it would be much more convenient to replace it with an equipment loan rather than use cash.
Equipment loans have very few outright disadvantages, especially if your business is generating revenue already. There are however certain risks. For one thing, the money from an equipment loan can only be used in purchasing the equipment for which the loan is meant; it cannot be channeled to offsetting other operating expenses.
Also, the general unpredictability of businesses makes it a risk. For example, you could take out a loan to buy new equipment to keep up with an increase of customers, only to have your customer base reduce drastically after you’ve taken the loan.
Types of Equipment Loan
Equipment loans come with different payback agreements. These all depend on the loan agency. Some lenders have a flexible payback plan and some others don’t. Some only loan to certain types of businesses while others give loans to any business. It all depends on your type of business and the type of equipment you’re looking to purchase.