If you’re considering borrowing money and are planning to put that new capital to use purchasing or leasing some sort of product, you may want to consider an equipment loan. They’re fast, relatively simple, and can be an outstanding choice when buying equipment is your goal.
But the process can be intimidating to the unfamiliar, so consider taking these steps to acquiring the equipment loan you need to take your company to the next level.
Step One: Make sure an equipment loan is your best option.
Most small businesses will eventually need a loan of some type. There are all sorts of different small business loans available to you. So before you take another step in the process, consider exactly why you need the capital you’re looking for.
An equipment loan, as its name implies, is a loan given with the specific purpose of purchasing, leasing, upgrading, or replacing some piece of equipment you use in your business. That could be a vehicle, some sort of expensive software, computers, machinery, or furniture.
Equipment loans tend to move faster than other types of borrowing and come with a couple distinct advantages. The most important advantage is probably the fact that once you’ve repaid an equipment loan in full, you’re the owner of the equipment you took out the loan to get.
Another advantage is that equipment loans can be secured by borrowers with worse credit than the typical term loan or SBA loan. A borrower with a credit score as low as 600 can usually take out an equipment loan quite easily, since the lender can accept the equipment as collateral. Even if your credit score is lower, the use of equipment as collateral can still help you get a good offer from a lender.
If all of those factors sound appealing, an equipment loan may be your best option for getting that next killer piece of tech or machinery.
Step Two: Consider how the equipment fits in your business plan
Once you’re done writing a business plan, ensure that you can make a new loan fit in. You’ve done the research into your market and your industry. You know how you’re projecting the company will perform. But how will borrowing money to buy equipment change those projections? Once you’re done writing a business plan, ensure that you can make a new loan fit in.
Some equipment won’t truly change the trajectory of your business as you originally planned. If the equipment loan is going toward a repair or replacement of existing equipment, your business may not experience much of a change. The same goes for if you’re upgrading a technology to keep up with the times. But if there are different reasons for getting the equipment, it could change your business plan significantly – and you’ll need to take a different approach.
Regardless of your immediate reason for acquiring the new product, you’ll also need to consider how the new equipment will affect your company. Is this new equipment necessary to the success or failure of your business? Is it part of a pivot? Will the new kitchen appliance at your restaurant bring in a new customer demographic? Will your new software free up hours for your employees to take on other tasks? Does the new vehicle you’re buying allow you to make more deliveries?
Do diligent research and project the changes that will come with the new equipment, and then revise your business plan accordingly. Be realistic, but it’s important to have an idea of where your company will be a year, two years, five years after getting this new equipment.
Step Three: Should you buy or lease?
Your answer to this question should fit in perfectly with your thoughts regarding the previous two steps. You know exactly why you’re acquiring the new equipment and you’ve got a pretty good idea – based on research – of how it’ll affect your company. So because of that, you’ll know whether you should buy or lease.
Buying a piece of equipment with an equipment loan typically involves a 20% down payment and regular payment until the loan is completely paid back and the equipment is yours to keep. If you fail to make payments, the lender can reclaim the equipment since it will have been used as collateral.
Leasing might be a better option if you’re a younger company with less regular cash flow or less cash on hand. You’ll pay a set amount per month with no down payment and after the terms of the lease have expired, you’ll return the equipment and possibly begin a new lease.
Leasing can be a great option for equipment that becomes obsolete every few years. If you know that in four years you’ll need to replace the technology you’re taking out a loan to pay for, it may be wise to lease. Or if you’re unable to make a large down payment, a lease could be a wise choice.
Step Four: Review your credit
Some equipment loan lenders will ask to see your personal and business credit reports, so before you apply for a loan, ensure that nothing is amiss on either report. Analyzing your business’s finances is vital regardless of whether you’re seeking a new loan, but doubly so at that point.
Remember, a loan for new equipment is in many ways an investment in your company, and a credit score is essentially the financial world’s way of determining how safe of an investment you may be.
If your score is lower, they’ll consider you less likely to have the ability to repay the loan. So do whatever you can possibly do to improve that number before you submit an application.
Step Five: Prepare documentation.
Lenders will want to know everything important about your business before they invest in it. So you’ll need to make sure you’ve got all of the important papers and documents reviewed and on hand before you move to the application stage.
You’ll need credit reports, of course. Business plans. You may also need proof of ownership, cash flow statements, a balance sheet, tax returns, bank statements, insurance policies, and any applicable licensure. When you’re looking to buy equipment, you’ll also usually need to have a contract or proposal from the seller in-hand to share with your funding company.
The exact list of the papers and proofs you’ll need will vary from lender to lender and loan to loan. But it’s important that you review this step repeatedly, as any missing documents at this stage can lead to a declined application from the lender, even if everything else is airtight.
Step Six: Re-evaluate after the decision.
Equipment loans are particularly fast-moving. Many lenders even take applications over the phone. If you work with the right company, you could get the decision (and the cash) from your lender as soon as the same day you apply.
If you were approved, congratulations. Put your new equipment to work as soon as possible and begin evaluating its usage and its effects on your company. Always be considering if new information changes your business plan and be prepared to make changes where they’re needed.
If you weren’t approved, ask the declining lender why that was. If it’s something you have power over, you could consider making necessary changes and reapplying for the loan. Or maybe it turns out an equipment loan wasn’t the best option after all. You may want to look into alternative types of funding in order to acquire the capital your business needs to be the best possible business it can be.