Using Equipment Financing to Grow: A Financing Option for Small Businesses

Business growth often requires investment. For many business owners, that investment takes the form of vehicles, machinery, or specialized tools. Equipment is particularly important for small-business owners who operate in the areas of construction, healthcare, logistics, and manufacturing, where it plays a significant role in day-to-day tasks. However, the upfront cost of buying these items is often difficult to manage, as it creates a cash flow burden on the business owner. This makes equipment financing for small businesses a key consideration.

Equipment financing is one of the many financing choices available to small-business owners. Since the equipment itself acts as collateral for the loan, lenders may perceive it as a lower risk. Lenders tend to provide predictable payment schedules and competitive interest rates. Additionally, equipment financing for small businesses could be an ideal option for owners assessing various methods of financing.

This article explores a general overview of how equipment financing works, where it fits in the overall spectrum of financing for small businesses, and when using equipment financing to sustain growth may or may not be a good choice for small business owners.

Understanding Financing for Small Businesses

In the United States, one of the primary barriers for financing for small businesses is limited access to capital. To solve this and fulfil business needs, many small businesses obtain outside financing which is provided by various forms of lenders.

Following are some of the several purposes that financing for small businesses typically serves:

• Purchasing equipment or vehicles

• Managing working capital

• Expanding operations

• Refinancing existing debt

• Supporting startups during early stages

To finance these operations, small business owners can take out loans including term loans, microloans, business lines of Credit, Credit Cards, and SBA-backed loans. All these kinds of loans have varying requirements for qualification, repayment, and underwriting. In addition, they have distinct uses, benefits and risks to the lender. Asset-based financing of equipment is different than cash-flow only based financing.

What Is Equipment Financing?

Equipment financing is one type of small business financing that helps businesses acquire equipment as lenders give the borrower the money to buy the equipment. The loan is secured by the asset itself, so there is less risk to financial institutions when providing this type of financing, which can help the borrower increase their chances of being approved for credit.

An equipment finance loan can be used to purchase:

• Commercial vehicles

• Manufacturing machinery

• Medical equipment

• Office technology

• Agricultural tools

Because the equipment holds measurable resale value, lenders may offer higher loan amounts relative to risk compared to unsecured small business loans.

Why Equipment Financing Appeals to Small Businesses

Equipment financing is frequently viewed as one of the more accessible options for obtaining funds due to how risk is allocated between borrowers and lenders.

For example, from the standpoint of lenders, having collateral will lower their potential loss if a loan goes into default. For borrowers, this means that when they take out an equipment financing loan to purchase equipment or machinery for their business, they will receive:

• Monthly payments that are easier to budget for because they are usually fixed

• Longer repayment terms, which helps reduce cash flow strain, and allows for greater flexibility with payment amounts

• Competitive interest rates

Therefore, borrowers have less of a reliance on personal credit when they utilize equipment financing loans.

According to the Federal Reserve Bank of Chicago Small Business Credit Survey, collateral-backed loans typically receive a higher percentage of approvals than unsecured loans.

Equipment as Collateral: Why It Matters

Collateral is a significant factor when it comes to underwriting. When equipment is pledged as collateral for a loan, lenders often use less weight of the borrower's credit score compared to other sources of collateral such as real estate. This can have significant advantages for startups or small and recently created businesses with limited credit history.

However, in assessing the creditworthiness of potential borrowers and the viability of a business plan, lenders will still consider:

• Annual revenue

• Cash flow stability

• Creditworthiness

• Business plan viability

Equipment financing for small businesses does not eliminate underwriting. It simply shifts part of the risk structure.

How Equipment Financing Supports Business Growth

As businesses grow, the need for additional capacity becomes more important. Equipment financing provides small business owners with the opportunity to increase their capacity without depleting their working capital.

By allowing borrowers to pay for equipment in installments rather than one large payment, equipment financing allows companies to maintain their liquidity while generating revenue from the equipment that is financed.

For example:

• Contractors can finance their purchase of heavy construction equipment in order to take on larger projects

• Medical practices can use equipment financing to purchase new diagnostic tools to offer expanded services to their patients

• Logistics companies can finance acquiring additional vehicles to expand their delivery capabilities

In all of these examples, equipment financing for small businesses help them grow their operations and simultaneously align repayments with the income generated from using the financed equipment.

Equipment Financing vs. Other Business Financing for Small Businesses

There are various types of business financing options for small businesses aside from equipment financing. By understanding the difference between equipment financing and other types of financing, small business owners can make the right choice.

Equipment Financing vs. Term Loans

Term loans allow for greater flexibility in how the money is used. Conversely, equipment financing limits the use of funds to the purchase of equipment or machinery.

Equipment Financing vs. Business Line of Credit

Business lines of credit are typically used to meet short-term cash flow needs. Conversely, equipment financing is designed to support long-Term Asset Acquisition.

Equipment Financing vs. Credit Cards

Business credit cards may offer speed but they often carry higher interest rates and lower loan amounts, which may not be sufficient in case of advanced and expensive equipment and machinery.

Interest Rates and Loan Structure

Interest rates for equipment financing for small businesses vary widely and are generally based on market conditions, borrower profile, and equipment type.

Typical characteristics include:

• Fixed or variable interest rates

• Loan terms aligned with asset lifespan

• Monthly payments for ease of budgeting

Since equipment depreciates, the underwriter may thoroughly assess the equipment's fair market value prior to issuing a loan

Tax Considerations for Equipment Financing for Small Businesses

Tax treatment is often part of financing decisions. By utilizing Section 179 of the Internal Revenue Code (IRC), a qualifying business may be able to deduct the entire cost of eligible equipment in the year the equipment is placed into service. in the year the equipment is placed into service.

Additionally, business owners may qualify to take advantage of bonus depreciation rules. These tax benefits could significantly impact their cash flow. However, each business's eligibility for these benefits will be based on its current tax position and situation. Therefore, before making any assumptions, it is advisable for small business owners to consult with a tax professional.

SBA and Government-Backed Equipment Financing

The SBA does not make any direct loans; rather, they guarantee loans made by approved lenders. SBA loan programs, including the 7(a) program, can be used for equipment purchases.

SBA government-backed financing typically has longer repayment terms and capped interest rates, but the eligibility requirements can be stricter.

Eligibility and Credit Considerations for Equipment Financing

Approvals for equipment financing differ with each vendor. However, there are several general factors which are common to consider. Some of these include:

• Your credit score

• Your annual revenue

• Your time in business

• The type of equipment you want to purchase.

When financing your equipment, your personal credit could still affect your ability to purchase. Keeping your personal and business finances separate via a business checking account and maintaining excellent personal credit might enhance your ability to obtain equipment financing.

Common Mistakes to Avoid when Financing for Small Businesses

Small businesses can benefit from equipment financing, but technology has created difficulties in using it effectively.

Some common pitfalls include:

• Anticipating higher revenue than is realistic

• Not factoring in total cost of ownership

• Using financing that is too large relative to the company's cash flow

• Not comparing all financing options before making a commitment

Choosing a Lender or Provider when Financing for Small Businesses

A small business owner may look for certain attributes when selecting a Lender or Provider for equipment financing, including:

• Honesty in their disclosures

• Experience with small business lending

• Clearly defined repayment terms

• Options to refinance or roll over existing debt

Additionally, FDIC-insured banks typically offer consumers a full range of protections.

Conclusion

Equipment financing remains a practical tool within the broader landscape of financing for small businesses. It is not universally ideal, but it offers structure, predictability, and accessibility when used thoughtfully. Evaluating business needs, repayment capacity, and long-term goals can help business owners determine whether this financing solution aligns with sustainable growth.