There are several types of equipment financing available, so it is necessary to identify the needs of a business as well as the eligibility requirements and costs of each lender. Consider these factors when choosing an equipment finance loan.
Before choosing an equipment finance loan, assess why the financing is needed and whether the equipment will help the business improve efficiency or increase bottom line. To do this, ask yourself the following questions:
- How critical is the equipment to the ability of the business to operate? Likewise, is the loan necessary to replace existing equipment or build on ongoing operations?
- Will the equipment improve the efficiency of the business or the quality of products and services? Will the equipment increase business revenues or decrease operating costs?
- Is the equipment necessary to remain competitive in the industry or corporate market?
- How much does the equipment cost and how much is available for a down payment?
- How fast does the business need the funds?
- How long will the equipment last or be used?
Ultimately, the needs of each business dictate the type and size of equipment finance loan it needs. In some cases, equipment financing may not be the best option, or purchasing new equipment may not be a sound business decision.
It is necessary to examine the eligibility requirements when comparing equipment finance so as to know if you are likely to qualify for a loan at a competitive rate. Eligibility requirements vary by lender, but equipment finance companies typically consider the following eligibility factors:
- Industry. A candidate’s industry affects their chances of approval as well as the down payment required and the interest rates available. This is because some industries pose more risk to lenders than others. For example, companies in the construction sector are often considered to be riskier than those in the transport sector.
- Duration in company. In general, an applicant must have been in business for at least 12 months to be eligible for equipment financing. Startups can still access equipment loans, but they must demonstrate sufficient cash flow and may need to provide a larger down payment.
- Annual revenue. Firms with at least $ 50,000 in annual revenue have a higher chance of being approved for equipment financing than less financially stable applicants. Lenders may require applicants to provide financial documents and tax returns to demonstrate the company’s ability to repay the loan.
- Credit ratings. Applicants must have a personal credit score of at least 650 to be eligible for equipment financing. That said, borrowers with poor credit or a limited credit profile may still qualify based on the income of the business.
Cost of financing the equipment
Equipment loan borrowers typically pay interest rates ranging from 2% to 20%. However, the financing of the equipment can also be accompanied by administration fees and assembly costs which are added to the overall cost. Keep in mind, however, that an application fee can be a red flag as lenders should never charge a fee until an applicant is approved for funding. Business owners should expect to pay a set-up fee equivalent to around 3% of the total loan amount.
Finally, most equipment finance requires a down payment of around 15% or 20% of the purchase price, although this number varies and some lenders do not require a down payment at all. When choosing an equipment finance loan, compare providers based on the overall cost of finance.