Equipment loans

Fundamentals of Equipment Loans: A Guide for Small Business Owners


From time to time, you’ll need to purchase new equipment for your business. In other cases, critical equipment for your business operations may go kaput. What if you don’t have the money to pay for either of these eventualities? The solution may be an equipment loan. Equipment loans are accessible sources of financing for small business owners who need to buy or upgrade their equipment for one reason or another. Let’s break down the fundamentals of equipment loans in a detailed guide.

What Is An Equipment Loan?

Simply put, an equipment loan is a small business loan intended to be used for financing business assets, including but not limited to:

• Heavy machinery

• Business materials or product components

• Safety materials

• Office furniture

• Tools

In essence, business owners can use equipment loans to pay for a variety of ongoing or one-time business costs depending on their needs. Equipment loans are versatile, flexible, and can be used to pay for part or even 100% of necessary equipment’s value.

How Do Small Business Equipment Woans Work?

As asset-based financing solutions, equipment-based loans are only meant to be used for business equipment, not business property or other expenses. In addition, most small business equipment loans require some already-owned business equipment to be used as collateral for the financing agreement.

For example, if a business owner defaults on an equipment loan, they may be required to give up the equipment purchased with the loan to the lender to cover the cost of the missed payments.

Furthermore, most small business equipment loans require a down payment of approximately 20%. Therefore, business owners may need to save up a significant chunk of cash before they are approved for an equipment loan.

Typical Equipment Loan Financing Rates

Small business equipment loans are available across a wide range of interest rates. The rate you receive for your equipment loan will depend on:

• The lender you take out a loan from

• The qualifications of your business

• The loan’s term

• The equipment’s projected value lifespan

In general, equipment financing loans carry interest rates that range from as low as 4% up to 30% APR. Of course, it’s always better to get an equipment loan with a lower APR if possible. Making a larger down payment on the loan (or taking out an equipment loan for less than the total cost of the equipment) may result in a better APR.

You can use equipment loan calculators to determine how much you’ll pay for an equipment loan over its lifespan.

Where Can You Get An Equipment Loan?

Equipment financing bulldozer

Heavy equipment loans, farm equipment loans, and other equipment financing can be acquired from a variety of lenders. Here are a few examples.

SBA Lenders

The US Small Business Administration or SBA works with a variety of lending institutions. These partnered SBA lenders, usually banks or credit unions, may give so-called SBA equipment loans to business owners like yourself.

Most SBA loans have relatively long terms (oftentimes up to 10 years or so) along with attractive, low interest rates. Like many equipment loans, SBA equipment loans usually use some equipment you own as collateral. Most SBA loans require a good personal credit score of 690 or more, plus good business finances.

Online Lenders

Online lenders offer fast equipment financing and flexible qualifications, so they may be attractive if you have a low personal credit score or don’t have a lot of collateral. They also tend to fund any approved loan request within 24 hours.

However, online lender equipment loans can be expensive and may carry higher interest rates, plus come with extra fees (such as late fees or application fees).

Banks/Credit Unions

Banks and credit unions also offer equipment loans directly without going to the SBA. The qualifications necessary for bank or credit union equipment loans vary, but you generally need a strong personal credit score of 700 or higher.

However, many equipment loans from banks or credit unions are exceptionally affordable. Some institutions, such as Wells Fargo, have business departments that are specifically intended to help small business owners finance equipment purchases. They offer specialized agriculture equipment loans, restaurant equipment loans, big rig lending solutions, and more for all kinds of businesses.

Uses For Business Equipment Loans

Small business owners just like yourself may use equipment loans for all sorts of things.


You Need New Equipment

For example, you can use an equipment loan to purchase new equipment that’s necessary for your business operations. Equipment loans for new equipment are often needed in a business’s earliest years when you’re trying to gather the tools and materials you need to turn a profit.

Your Current Equipment Needs To Be Upgraded

Alternatively, maybe you need an equipment loan to upgrade your current equipment. This is crucial if your current equipment is old or needs upgrades in order to stay competitive according to the standards of your industry. For example, maybe you need your forklift or heavy machinery upgraded so it can carry heavier loads.

A Traditional Business Loan Takes Too Long

While you can use traditional business loans to purchase equipment and supplies as well, traditional business loans often have a longer approval process. It may take too much time for you to get the funding you need.

If you need some cash to purchase equipment as quickly as you can, equipment loans may be a wiser option.

You Can’t Repair Current Equipment

Or maybe your current equipment is broken beyond repair or is dangerous to your clients and employees. In such circumstances, you can use an equipment loan to replace suddenly broken equipment quickly without having to bring your business to a sudden halt.

Tax Benefits

Some small business owners benefit from equipment loans because they provide tax breaks. Many new equipment purchases can be written off as business expenses, oftentimes up to $500,000. This could save your business quite a lot of money come tax time, especially if your business is in financial straits.

Pros & Cons Of Equipment Loans

equipment financing loan

Equipment Loan Pros

• Equipment loans are relatively affordable and offer competitive interest rates

• With equipment loans, you own any purchased equipment outright as opposed to leasing the equipment

• Since business equipment is often used as collateral, you don’t always have to rely on your personal credit or other collateral forms to qualify for a great loan

• Some equipment loans may qualify you for extra tax savings

Equipment Loan Cons

• Many equipment loans require high initial down payments of 20% or more

• If you default on an equipment loan, you may lose crucial business equipment and be unable to keep your business running as a result (though this depends on what equipment you use as collateral)

Is An Equipment Loan Right For My Business?

Ultimately, you have to determine whether an equipment loan is right for your business by deciding:

• Whether the risk of defaulting is worth receiving funds immediately

• Whether you absolutely need the equipment you plan on purchasing

• Whether an equipment loan is a smart choice for your business based on your current financials

Many business owners do benefit from equipment loans, especially if they pay them off in a timely manner and keep track of their finances to avoid defaulting. However, an equipment loan will not save your business from sinking if other issues are responsible for your financial problems.

You should only take out an equipment loan if you are building up a business from scratch, if you’re replacing broken equipment you can’t pay for out-of-pocket, or if you’re confident your business will turn a profit in the short term future.

How Long Are Equipment Loans Typically?

Most equipment loans have terms ranging from five years to 10 years, though the terms are usually based on the anticipated life for the equipment you plan to purchase with the funds. For example, if you wish to purchase a new crane for your shipping business, and the crane has an expected life of eight years, your equipment loan may have a term of eight years as well.

How Do You Qualify For Equipment Financing?

Like all financing, equipment loans require certain qualifications before you’ll be approved for funds. To qualify for equipment financing:

• Be sure your personal credit is as high as possible. A credit score of 650 or above is recommended for most equipment loans

• Get your business finances in good shape. Having some documents showing your business’s profits and annual revenue is a good idea

• Make sure your business has good cash flow to prove that you can repay the loan on a month-to-month basis

Equipment Loans For Bad Credit Borrowers

Equipment financing

If you don’t have great personal credit, you may still be able to acquire an equipment loan, especially through an online lender. However, these loans may have high interest rates and could require you to make a larger down payment or put up additional equipment as collateral.

Bad credit borrowers may be able to acquire small business loans by making a down payment of 50%, for example. Alternatively, you can apply for equipment loans for less money and try to pay for the rest of the equipment purchase another way.

How To Apply For An Equipment Loan

To apply for an equipment loan:

• Find an equipment loan lender, such as an SBA-partnered bank or credit union, or an online lender, that offers equipment loans within your credit score range. Investigate all the equipment financing options available to you

• Apply for the loan after gathering the materials mentioned above

• Then wait for the approval. If you are applying online, preapproval should only take a few minutes

• If/when you are approved, review the loan’s terms and conditions carefully. Make sure that the loan term and interest rate are acceptable based on your current financial situation

• Then receive your funds from your lender. Funds should appear in your business bank account within one to two business days (or even less than 24 hours in some cases)

Is Equipment Leasing Better Than An Equipment Loan?

While equipment loans can be helpful for small business owners, equipment leasing may be better depending on your financial situation.

Some lenders offer equipment leasing agreements, in which you rent a piece of equipment that your business needs. Once an equipment lease is up, you return the equipment, purchase the equipment, or renew the lease. Equipment leasing is oftentimes more affordable in the short term, but it rapidly becomes more expensive if you rent the equipment for a long period of time.

For example, if you lease heavy equipment for 36 months, you’ll pay more than if you acquired a loan to buy the equipment outright in most cases. Therefore, you should only use equipment leasing if you:

• Will only use the equipment for a short period of time

• Know that you won’t use the equipment after your current business needs are fulfilled

Wrap Up

All in all, the best equipment loans will be affordable, have excellent terms, and will help you purchase the equipment your business needs to succeed quickly and easily. However, be sure to review any equipment loan terms and conditions carefully before signing on the dotted line – that way, you don’t become trapped in a subpar loan arrangement and have to give up some equipment later down the road.

Is It Hard To Get An Equipment Loan?

Equipment Finance

It’s not very hard to get an equipment loan if you have reasonably high credit and good business history (plus good cash flow). However, it can be tough to get an equipment loan if you don’t have any of these factors, even if you have cash saved up.

Our team at Upwise Capital is here to assist you with every step of the way to secure whatever funding is needed to help your business grow. If you have any questions regarding how equipment financing works, please call our team at 77-55-UPWISE or email [email protected].  You can also apply online for equipment financing, so you can get back to work and running your business.

So…What Do You Think? 

We want to hear from you. What do you think of this article and was it helpful in your search for equipment loans? 

Let us know by leaving a reply below. Feel free to share this article on your social media. 


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