Equipment Financing Options for Small Businesses in the US

When securing equipment financing, landing on the right lender may turn to be an exhausting endeavor. Favorable terms and conditions of equipment loan and period of processing the loan are some of the factors to consider. Sometimes, getting the best lender may depend on the relationship that you have developed with the lender. Generally, you may want the lender to be an expert in the nuances of your business and accept your preferences in the formation of terms. It becomes beneficial if you get the best terms from the lender. If you do not get favorable terms, try looking elsewhere.

The main point here is; avoid relying on a single lender. Relying on one lender is a limitation to getting the best loan terms by other lenders. There are a number of benefits to having a variety of lenders for your equipment financing options.  The following are various equipment financing options available for small businesses in the US and their respective pros and cons. If equipment financing loans can be paid back in monthly payments, is part of the loan agreement.

Traditional Banks

Typically, banks lend based on a business’s cash flow and the creditworthiness of the entrepreneur in case of a sole proprietorship. This is as opposed to the assumption that they would look at the value of the equipment. For this reason, traditional bank loans can be excellent options for established businesses. On the other hand, the lack of revenue and financial history means that startups usually do not qualify for bank loans.

Pros: this financing option is an excellent solution for small and large equipment purchases. The loans are famous because of having lower interest rates and advantageous repayment terms

Cons: the loans require strong credit and financial history. Generally, the loans may not be available to startups or to businesses and entrepreneurs with weaker credit histories.

Small Business Administration

The U.S. Small Business Administration (SBA) does not directly give loans. Instead, the SBA provides guarantees to lenders to incentivize them to lend to small businesses. SBA programs include micro-loans for small equipment purchases, under $50,000 and 504 loans for large equipment, exceeding $10 million.

Pros: loans with backing from the SBA work well for many small business needs and come with competitive rates and terms. These loans can work for startups and borrowers with imperfect credit histories. It is easier to qualify for these loans than traditional bank loans. The loans have good interest rates and repayment terms while a range of loans covers small and large equipment financing.

Cons: there are long application and processing time than some alternative lenders. Besides, the loans require personal guarantees on the loan and, sometimes, additional collateral.

Community Development Financial Institutions (CDFIs)

CDFIs comprise mission-based lenders such as nonprofit organizations. Sometimes, CDFIS includes credit unions that focus on underserved small business populations such as women, minorities, and low-income entrepreneurs. In most cases, CDFI loans are meant for working capital purposes and equipment purchase is an allowable use.

Pros: these loans have an easier qualification and shorter loan-processing time. In addition, the loans have longer repayment terms. Often, CDFIs give a range of financial management educational programs and other support for small business borrowers.

Cons: these loans are limited to a maximum of $100,000. The loans may have higher costs than traditional banks or SBA-backed loans. Nonetheless, the costs are still less than most asset-based or non-bank alternative lenders.

Alternative Lenders

These lenders may include peer-to-peer financers and do not specifically fund equipment. Instead, they fund working capital needs. Alternative lenders are considered cash-flow lenders implying that they give loans based on a business’s daily or weekly receipts.

Pros: it is easier to qualify for these loans and they have a shorter processing time.

Cons: the loan limit does not exceed $100,000. The loans have very high interest rates and short repayment term. Often, the loans have weekly or daily repayments. This repayment method can make the loans very difficult for small businesses to manage.

Business equipment leases

For many small businesses, leasing is a great alternative to purchasing equipment. A business owner does not have to come up with the full purchase cost. Lease payments have lower costs than loan payments would be for the same equipment. This is because you are essentially paying to borrow the use of the equipment. In the US, the most popular leases include operational leases and capital leases, with different tax implications. Before going for any type of lease, it is good to get more information from your accountant or tax advisor.

Pros: there are lower payments than loans for the same equipment. The entrepreneur may have an option to purchase at the end of the lease, to return the equipment, or to lease new equipment.

Cons: Typically, leases have higher overall costs than outright purchases. Newly established businesses may need to provide personal collateral for lease approval.

If you would like more information about the available equipment financing options for small businesses in the US, get in touch with us.