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Updated on Wednesday, December 12, 2018
You may have the best team in place to run your small business, but you won’t get far without the equipment you need to operate. Whether it’s office furniture, software or heavy machinery, these pieces can be essential to your success.
If you don’t have enough cash on hand to purchase equipment outright, you can turn to equipment financing to help with the transaction. Small business owners can find equipment financing options at their local bank and equipment financing companies, many of which operate online.
When shopping for equipment financing, LendingTree can be a useful starting point. You can compare leases and loans from several equipment financing companies to help you figure out which is best for you. (LendingTree is the parent company of MagnifyMoney.) Before you get started, we’ll help you understand why you might need equipment financing and what funding options are available to you.
What is equipment financing?
Whether buying something new or replacing an outdated piece of equipment, small business owners typically do not have money on hand to cover the purchase, said Michael Aversa, partner and head of the Private Business Services Group at advisory firm EisnerAmper. To finance equipment, you would need to obtain a lease or a loan from a traditional bank or an equipment finance company. No matter which one you choose, the equipment itself usually serves as collateral. If you fall behind on payments, the lender would take the equipment. With any type of business loan, collateral or a personal guarantee is typically required, reducing the risk to the lender.
Where can you find equipment financing?
Finance companies often specialize in certain types of equipment and they may be more willing to lend to you than a bank, said Mike Toglia, CEO and executive director of the National Equipment Finance Association. Financing companies usually have different eligibility criteria than banks and they’re often less strict.
“They’re willing to advance more money against the collateral because they’re more comfortable with the collateral,” Toglia said.
Financing through the equipment vendor. Most small business owners have the piece of equipment picked out before they go to their bank or a finance company to seek funding, Toglia said. The equipment vendor may offer a financing package, just like a car dealership would offer financing when you purchase a new car. However, you’re free to obtain financing from any institution or company of your choice, Toglia said.
“A small business owner should look around and see what else they can get,” Toglia said. “They should be shopping for expertise and competitive rates.”
Equipment loan vs. lease
Do you want to own a particular piece of equipment or would you be better off leasing it instead? Here’s how to understand the difference.
A loan typically requires a down payment, usually 10 to 20% of the total cost of the equipment. You would finance the remaining balance and pay your debt with interest for a specific period of time.
Because equipment is used as collateral, equipment loans tend to have relatively low interest rates and manageable payments. Terms typically range from six months to 10 years, making a loan a good option if you will be using your equipment for a long time. But if the equipment quickly becomes obsolete or needs to be replaced, you would still have to pay the loan in full.
To qualify for an equipment loan, you need to have good personal credit. In addition to a down payment, you may have to pay an origination fee, application fee or appraisal fee, depending on your loan agreement. The fees would depend on the loan offering from a bank or online lender.
An equipment lease from a financing company may be a good option if you need assets that don’t have a long shelf life. An equipment lease typically does not require a down payment, plus monthly payments are usually lower than those of an equipment loan. You may have the option to purchase your equipment at the end of the lease term for residual value or trade out equipment for a newer version in the middle of your contract.
The interest rate would be built into the total lease amount, and high rates tend to make leases more expensive overall than term loans, Aversa said. However, you wouldn’t have to meet high credit requirements to qualify for a lease like you would if you were seeking a loan and you wouldn’t be stuck with a potentially obsolete piece of equipment.
“There are a lot of companies that don’t have bank financing and the lease is the only way to go because their credit isn’t good enough,” Aversa said.
Two types of equipment leases
One of the main differences between the leases is how you record them in your books, Aversa said. A capital lease would appear as an asset on your balance sheet, while an operating lease would not appear on your balance sheet.
- Operating lease: These are generally used for short-term leasing. They don’t involve transfer of ownership at the end of the lease term, making them similar to renting, which is why they would be treated as an operating expense, not a loan, on your balance sheet.
- Capital leases: These are typically used to lease longer-term assets, and ownership can be transferred to the lessee at the end of the term. A capital lease could also present the option for the lessee to purchase the equipment at the end of the term for a discounted price. Because a capital lease involves the transfer of ownership, it is considered a loan on your balance sheet and you would have to record interest expenses.
However, rules from the Financial Accounting Standards Board that go into effect in 2020 will require all leases to be recorded on balance sheets. The change could lessen the appeal of equipment leases compared with loans, Aversa said. “That could have a dramatic impact on a lease versus buy scenario.”
Best equipment financing companies
Celtic Commercial Finance
Celtic Commercial Finance offers equipment leases ranging from $100,000 to $10,000,000. Leases spanning 24 to 120 months are available to finance a variety of equipment, including machinery, software and computers. Celtic Commercial Finance issues operating leases and capital leases, as well as several specialized leases and purchase/leasebacks. Celtic works with businesses that have $20 million to $250 million in annual revenue and at least three years in business. No down payment is required but Celtic does ask for one month’s payment upfront, as well as a documentation fee. You can submit an application online.
Crest Capital offers several equipment loans and leases. Many Crest Capital leases come with purchase options to give you full ownership of your equipment at the end of the lease term. Crest Capital also offers flexible payment plans. Crest Capital provides 100% financing for transactions between $5,000 and $500,000. Applying for a Crest Capital loan or lease won’t impact your personal credit and you could be approved in a matter of hours.
National Funding offers up to $150,000 in equipment leasing for new and pre-owned assets. National Funding requires just six months in business and a personal credit score of 620, as well as a quote from your equipment vendor. Businesses owners could obtain a lease for a range of items, from construction equipment, fitness equipment, office equipment and commercial vehicles. For customers who pay off their balance early, National Funding takes 6% off their total remaining balance.
Reliant Funding helps business owners lease new or used equipment, including software, work vehicles, office furniture and other fixtures. Borrowers can apply online and could be approved within one month. After approval, it takes three to five days to receive funding. Reliant Funding considers the type of equipment and your credit rating when determining the cost of your lease. Reliant Funding finances between $5,000 and $250,000 and works with businesses in a range of industries, including construction, restaurants, health care and transportation.
CIT Equipment Finance
CIT Equipment Finance funds small-ticket transactions up to $1,000,000, as well as larger deals ranging from $3 million to $100,000 million. CIT offers equipment financing for small businesses, equipment manufacturers, franchisers and commercial entities. CIT’s core markets are technology, office imaging, health care, industrial and franchise finance. The company’s loan programs include capital leases, operating leases and loans, and are tailored to the specific borrower and their industry.
What you need to apply
When shopping for equipment financing, it’s important to do your due diligence to make sure you’re choosing a trustworthy finance company if you’re not borrowing from a bank. After you submit an application, the company will also make sure you can be trusted as a borrower during the underwriting process, Aversa said.
“Depending on how your company has done and is doing, it can a be a very straightforward or very difficult,” he said.
In addition to your application, the finance company will likely want to see a few documents:
- Business license, Employer Identification Number or statement of incorporation to prove ownership
- Profit and loss statements
- Recent tax returns
- Business plan
- Personal or business credit report
Business owners should think about the future when applying for equipment financing, Toglia said. You’ll likely need additional equipment in the future, and if you maintain a good relationship with the finance company, you would have a better chance of being approved again next time, he said.
“Look for a finance company that can help with your equipment needs today and tomorrow,” Toglia said.