Equipment cost takes up a big chunk of your business expenditure. Obtaining funds for equipment is especially hard for small businesses since their cash flow is not yet established. However, having the right equipment is essential for your business to operate optimally.
There are a lot of ways to finance business equipment. As long as you know what and where to look, you can find a way to finance, upgrade, or repair your business equipment. But what types of financing should we consider? Here are some of them.
Term Loans
A term loan offers business owners cash in exchange for repaying terms. Usually, term loans are most suitable for small businesses with an established cash flow and financial statements. However, some companies borrow cash to maintain their workflow. So these loans are quite popular among businesses, and banks have established financing programs to help them.
How do you get term loans? You find a lender or a bank to apply for a term loan. You provide financial statements or other evidence to prove your creditworthiness. If your application is approved, you will get a lump sum of cash that will be repaid over a certain period on a monthly or quarterly basis, just like a traditional loan.
Also, term loans come with fixed or variable interest rates. If the cash is for equipment, it would also impact the repayment terms. Usually, the loan will turn into a secured loan wherein the equipment becomes the collateral. That means if you default on the loan, the equipment will be a form of payment for the loan.
Equipment Loans
Just as the name suggests, this loan product is designed to give the borrower a lump sum of cash to buy, repair, or upgrade their equipment. You can get this loan from a bank or alternative lenders.
Usually, with an equipment loan, you can finance 100% of the total value of the equipment. Also, the annual percentage rate is commonly between 8-30%. However, it’s common for lenders to require at least 5-20% of the equipment’s total value as a down payment. Approval is usually fast; you can get the money within the week because the loan is secured.
SBA 504 Loans
SBA 504 loans or more commonly known as CDC/504 loans, are offered by Certified Development Companies backed by the federal government. SBA 504 loans are part of the three core US Small Business Administration loan programs, along with microloans and 7a loans.
These are used to finance significant business purchases like real estate or machinery. SBA 504 loans provide money like hardship fast cash, but it’s specifically aimed at equipment purchases. Usually, the loans are capped at up to $5 million, but some qualified projects are sometimes allowed at least $5.5 million.
- The funding itself comes from three places:
- A Certified Development Company: 40%
- Bank or Credit Union: 50%
- The business itself: 10% (It can go up to 20%, depending on the project, and it acts as a down payment for the loan itself.)
Who can qualify for the SBA 504 loan? Like other types of federally-backed business loans, borrowers must meet some requirements before they can be approved. The usual requirements are:
- For-profit businesses operating in the US
- The average income of less than $2 million for two years before the application
- A net worth of less than $15 million
- The project itself can sustain several jobs or meet other public policy goals.
To get an SBA 504 loan, you need to find a Certified Development Company. These non-profit organizations will usually be the ones who will process your application, coordinate your financing, and submit the loan package to the SBA. The loan will usually take a month or two to close if your application is approved. It can be longer if your purchases are pretty complicated.
Final Words
Equipment can be costly, but they are necessary for your business to work. Luckily, there are several ways for us to finance it. If you are not sure where to begin, you can start by looking for financing methods similar to the ones discussed above.
