There are several types of equipment financing available, so it’s necessary to identify a business’ needs as well as each lender’s eligibility requirements and costs. Evaluate these factors when choosing an equipment financing loan.
Before choosing an equipment financing loan, evaluate why the financing is necessary and whether the equipment will help the business improve efficiency or otherwise add to its bottom line. To do so, consider the following questions:
- How vital is the equipment to the business’ ability to operate? Likewise, is the loan necessary to replace existing equipment or build on current operations?
- Will the equipment improve the business’ efficiency or the quality of products and services? Will the equipment increase the business’ revenue or decrease the cost of operations?
- Is the equipment necessary to stay competitive in the business’ industry or market?
- How much does the equipment cost, and how much is available for a down payment?
- How quickly does the business need the funds?
- How long will the equipment last or remain in use?
Ultimately, each business’ needs dictate the type and size of equipment financing loan it needs. In some cases, equipment financing may not be the best option, or purchasing new equipment may not be a savvy business decision.
It’s necessary to look at eligibility requirements when comparing equipment financing so you know whether you’re likely to qualify for a loan at a competitive rate. Eligibility requirements vary by lender, but equipment financing companies generally consider these eligibility factors:
- Industry. An applicant’s industry impacts its approval odds as well as the required down payment and available interest rates. This is because some industries pose more risk to lenders than others. For example, businesses in the construction industry are often considered riskier than those in the transportation industry.
- Length of time in business. In general, an applicant should be in business for at least 12 months to qualify for equipment financing. Startups can still access equipment loans, but they must demonstrate sufficient cash flow and may need to provide a larger down payment.
- Annual revenue. Businesses with at least $50,000 in annual revenue have greater approval odds for equipment financing than less financially stable applicants. Lenders may require applicants to provide financial records and tax returns to demonstrate the business’ ability to repay the loan.
- Credit scores. Applicants should have a personal credit score of at least 650 to qualify for equipment financing. That said, borrowers with low credit—or a limited credit profile—may still qualify based on the business’ revenue.
Cost of Equipment Financing
Equipment loan borrowers generally pay interest rates spanning anywhere from 2% to 20%. However, equipment financing may also come with application fees and origination fees that add to the overall cost. Keep in mind, however, that application fees may be a red flag, as lenders should never charge a fee before an applicant is approved for financing. Business owners should expect to pay origination fees equal to around 3% of the total loan amount.
Finally, most equipment financing requires a down payment of around 15% or 20% of the purchase price, though this number varies and some lenders don’t require down payments at all. When choosing an equipment financing loan, compare providers based on the overall cost of financing.