Industries that rely on expensive equipment to continue operations – like construction, trucking, or medical practices – can often lack the means to pay for a new piece of equipment when needed. Equipment financing empowers small business owners to get essential equipment or the latest tech without straining cash flow.
In equipment financing, the equipment itself usually acts as the collateral for the loan which reduces the risk for the lender. This means that if the borrower defaults on the loan, the lender has the right to seize and sell the equipment to recover their funds. This arrangement gives the lender security and often allows them to offer more favorable terms compared to unsecured loans.
Benefits of Equipment Financing
Equipment financing options provide small businesses seeking essential assets with many benefits. Some key advantages include:
Cash flow preservation: By using equipment financing options like equipment loans or leasing, small businesses can spread the cost of the equipment over time, allowing them to preserve their cash flow. This ensures they have the required funds to cover day-to-day operational expenses.
Fast(er) approval & application process: Equipment financing, when compared to other types of financing options, often has a quicker approval process, allowing small businesses to obtain the equipment they need, when they need it.
Preserve credit lines: By using equipment financing options instead of credit lines or other forms of credit, small businesses can keep their credit lines open for emergencies or other needs.
Build business credit: Timely payments can help small businesses establish and strengthen their credit profile which is beneficial for future borrowing needs.
Competitive edge: Upgraded equipment that increases efficiency can provide the business with a competitive edge, enabling them to provide better products or services.
Exploring Equipment Financing Options
Equipment leasing and equipment loans are two distinct methods of obtaining equipment for a business. There are two key differences between the two financing options.
Equipment leasing: In a lease agreement, the company leasing the equipment retains ownership throughout the entire lease term. The business makes regular lease payments to use the equipment but does not own the equipment. At the end of the agreement, a business owner can decide to keep the leased equipment or return it.
Equipment loans: With equipment loans, the business borrows funds from the lender to buy equipment. The business owner becomes the owner of the equipment from the beginning of the loan term and fully owns it after paying back the loan.
Equipment leasing: Lease terms are typically shorter than loan repayment terms ranging from six months to five years on average.
Equipment loans: Equipment loans may offer longer repayment terms, anywhere from three to 10 years, resulting in lower monthly payments.
Tax Benefits for Equipment Financing
Section 179 of the US Tax code offers small businesses a great opportunity to deduct 100% of their expenses on essential depreciable assets like equipment, vehicles, and software, which helps reduce their tax burden in the current year.
Currently, in 2023, the Section 179 deduction limit is $1,160,000 with $2.89 million being the most money you can invest on qualifying equipment purchases. To qualify for the deduction, the equipment must be financed and used between January 1 and December 31 of the current tax year.
Choosing the Right Lender
When exploring your financial options, it’s important to consider both traditional lenders, like banks, and alternative lenders. While traditional lenders have been the go-to choice for business owners in the past, alternative tech-savvy lenders are gaining popularity for several compelling reasons:
Streamlined process: Time is of the essence for small businesses. Unlike traditional lenders which can have lengthy approval processes, alternative lenders offer a faster experience. You can easily apply online, and in many cases, receive an approval within 24 hours, ensuring you get the equipment you need, when you need it.
Flexibility in eligibility: Traditional lenders typically have stricter requirements that may exclude newer businesses or those with less-than-perfect credit. Alternative lenders are more flexible in their eligibility criteria. They consider various factors beyond just your credit score, giving small businesses with limited credit history a better chance to qualify for funding.
Tailored repayment options: Alternative lenders offer customized repayment plans. You can browse through the various options or work closely with the funding specialists to find what works with your cash flow.
Alternative lenders, like the SmallBusinessLoans partners, typically have flexible eligibility requirements such as:
- $250,000 in annual revenue
- Fair to excellent credit
- At least 1 year in business
Equipment financing options offer small businesses a smart and accessible way to acquire required assets. Whether it’s through equipment loans or leases, these financial solutions provide flexibility, preserve cash flow and empower small businesses to stay competitive in their industry.
About the Author
Pretha Yasmin is the consumer analyst for SmallBusinessLoans. She has more than five years of experience in marketing and studying consumer behavior for a wide range of industries including finance, construction, and hospitality. She holds a Bachelor of Business Administration in marketing from Brooklyn College.