The Pros and Cons of Equipment Loans

Regardless of the industry you’re in, your company needs at least one type of equipment for daily business operations. But equipment and machinery can be expensive, and small business owners don’t have the budget to pay for it upfront. In fact, even established businesses don’t have the funds to replace an MRI machine or a backhoe when it stops working. When business owners need equipment but don’t have enough funds to purchase one, they apply for equipment financing.

Equipment financing is a financing solution for business owners looking to fund their equipment purchases or leases. According to the Equipment Leasing and Financing Association (ELFA), 78% of businesses in the United States finance equipment purchases through business loans. Here are common examples of equipment and machinery that can be purchased with an equipment loan:

  • Medical equipment
  • Restaurant ovens and ranges
  • Farming equipment
  • Manufacturing machinery
  • IT services and software and other equipment
  • Construction equipment and machinery
  • Trucks and other vehicles

Pros and Cons of Equipment Financing

Before you apply for equipment financing, it’s best to evaluate your business if you’re eligible for this type of financing. It also helps to weigh the pros and cons to avoid wasting precious time and money.

The Pros:

No Collateral Needed

Unlike traditional business loans, you don’t need to pledge any personal or business assets with an equipment loan. The equipment you’re going to purchase serves as collateral for the loan, which significantly lowers the risk on your part.

Flexible Payment Terms

The terms of the loan ultimately depend on your lender, so it’s highly beneficial to build a good relationship with your lender. Repayment terms range from monthly, quarterly, or even annually. Inform your lender on which terms work for your business.

Instant Funding

If you need to replace equipment ASAP, you’re in luck. With equipment financing, you can access the funds in as little as 24 hours! Again, this entirely depends on your lenders but generally, equipment financing offers faster funding compared to traditional business loans.

The Cons: 

Limited to Equipment Only

As the name suggests, you can only use equipment financing for equipment purchases/lease. If you need the funds for paying rent, hiring more workers, or other business expenses, it’s better to apply for a traditional business loan.

More Expensive Interest Rates

The rates for equipment financing go as low as 5%. And if you have a great credit history, you’ll be able to snag interest rates that are lower than traditional loans. Traditional lenders often take a longer time to approve your application, and they may need to see more documentation. If you need equipment financing ASAP, alternative lenders are your best bet.

Equipment Ownership

While this may seem more like a pro than a con, owning the equipment is a pro and a con, depending on how you look at it. When you apply for an equipment loan, you’re basically borrowing money to purchase equipment, and therefore own it. If you don’t want to own equipment, you can lease it instead with an equipment lease. Equipment leasing is making monthly payments to use certain equipment. Once your lease term is over, you can either purchase said equipment or return it.

Equipment loans are a great option if you’re looking to purchase long-term equipment. On the other hand, you can go to an equipment lease if the equipment depreciates quickly or becomes obsolete.

Apply for Equipment Financing Today!

Equipment financing is great for businesses looking to purchase or lease equipment. To know more about it, SMB Compass’s lending experts are willing to answer your questions with no obligation on your part. Don’t hesitate to call us at (888) 853-8922 or email us at info@smbcompass.com and speak with an expert today.

Related Posts