Commercial equipment loans are a valuable way to expand business in an efficient manner, but what type of loans are best for you?
The majority of businesses utilize commercial equipment loans to:
- Reduce upfront costs
- Preserve their cash flow
- Make better use of their working capital
- Benefit from the tax advantages of writing off the interest on loan repayments and assorted costs
Commercial equipment loans can also help improve your business credit score and enable you to negotiate better terms and conditions on future loans. There are other assorted tax and cost advantages, but the general gist of it is that an equipment loan helps you save money spent elsewhere.
But what kind of loans are best for financing commercial equipment? There are multiple different ways you can get the money needed to finance new or used equipment for your business, each with their own set of pros and cons. Let’s go over some of the basics of commercial equipment loans.
1. Term Loans
A term loan is the most basic type of business loan. It has no specific strings attached and exists as a baseline option. You receive a lumpsum of cash and repay with interest via monthly installments over a predetermined period.
Some of the benefits of a term loan include:
- Instant upfront cash
- Higher borrowing thresholds than most other types of loans
Because it’s such a ubiquitous offering, you will have no trouble finding lenders who will be willing to send an offer your way and will have plenty of lenders to compare between – from traditional banks to other financial institutions and countless online lenders.
On the other hand, the downsides of a term loan include:
- They’re limited by your credit
- May be more expensive in the long run than a few other options with greater specificity
- They will often require a collateral – even if it’s a personal one
That last con is resolved quite easily when seeking a basic term loan explicitly to purchase equipment, of course.
2. Commercial Equipment Loans
Equipment loans skip the middleman and go straight to the acquisition of equipment. The term of the loan is usually based on the useful lifetime of the equipment itself, and the equipment serves as collateral for the loan.
Rates can be highly competitive, and depending on your credit, you might barely take a hit from considering a loan versus buying the equipment outright, even when factoring in the entirety of the interest over the equipment’s lifetime, as well as value depreciation.
The biggest benefit of an equipment loan versus a term loan is that you get the equipment you need without having to pay for all of it upfront. It may also be much easier to secure an equipment loan than it is to get an equal value term loan at a similar rate and cost. Commercial equipment loans may also include the soft costs associated with regular maintenance.
Arguably the greatest downside to an equipment loan is that your equipment often only lasts about as long as the term for financing it, at which point it may either begin to break down, or you may be in the market for new equipment anyway.
3. Commercial Equipment Leases
Commercial equipment leases eliminate the concerns with being stuck with equipment you have no use for at the end of your term. In an equipment lease, you effectively rent the equipment for as long as the lease stipulates, at which point you have the option to buy it for the remainder of its unpaid value (or whatever the terms of the lease are), or you can opt to renew your lease with a new piece of equipment from the same lender/vendor.
If you’ve ever leased a car privately, leasing equipment commercially is very much the same thing. Most of the costs are rolled into the lease, and you get the perks of only paying for as long as you end up using the equipment, which is very helpful when you’re in an industry where upgrades in equipment and hardware are effectively mandated every five to ten years in order to stay competitive. The most common types of equipment leasing include medical equipment leasing, IT equipment leasing, and manufacturing equipment leasing.
4. Business Line of Credit
A business line of credit differs from a lump sum loan in that you are provided with access to funds up to a certain limit, and only pay interest on the funds you end up withdrawing. The main difference between a business line of credit and a regular term loan is that you only pay interest on the funds you need, while maintaining the financial flexibility any business might seek by retaining the option to withdraw more whenever necessary.
Of course, these flexibility perks do come with a few caveats, so it’s always a matter of weighing your financial risk. While flexible and typically unsecured, a business line of credit requires very solid revenue and good credit, as well as proof of cash flow and some additional costs (draw fees, notably).
5. SBA Loans
The Small Business Administration specializes in providing these SBA loans via affiliated banks and lenders. These are guaranteed loans, with some of the lowest rates on the market and a very high borrowing cap. They are also typically very long-term.
These are the kind of loans small businesses take out when seeking capital to heavily expand or build an idea from the ground up, with a multi-year vision on how to do so. SBA loan terms range from up to seven years for working capital, to up to 25-year terms for real estate purchases. Commercial equipment loans through SBA lenders include terms up to ten years.
The caveat is that they are hard to qualify for, with a tough application process.
Finding the Best Loan for Your Needs
Businesses, regardless of their size, must make use of every loan available to them to maximize their growth and build the most equity. But when it comes to equipment specifically, it’s hard to beat an equipment loan or lease.
Choosing the right commercial equipment lender is all about comparing rates and costs, weighing your options, and shopping around. If you’re in need of equipment leasing and financing, contact Heartland Financial Group today.