Did I Get a Good Business Equipment Financing Deal?

If you run a business that utilizes expensive equipment, chances are you’ve already gotten business equipment financing for a new equipment purchase. And now that you’re committed to monthly payments, you’re probably wondering if you got a good deal.

The answer to that has just as much to do with your business needs as crunching the numbers in your deal. For instance, several equipment financing options exist but not all are viable for all business owners.

To figure out what kind of deal you have, it helps to understand what lenders look for and what you should do to make your business attractive to a lender.

Determining the Best Business Equipment Financing Deal From Your Viewpoint

So what factors play into which loan is best and offers the best deals for you and your business? Once you have your loan, which things should you look at to see if you’ve gotten the best deal? Ideally, these are things you’d look at before you sign and agree to the loan terms. But, it doesn’t hurt to evaluate your deal after the fact.

The things you can assess to determine whether or not you got a good deal are:

• Did the loan amount cover all your needs so you could get all the equipment needed?
• Were the upfront costs of the loan, including application and origination fees, reasonable? How did they compare to other lenders?
• Was the loan application process timely and streamlined? Or did a delay in receiving your funds hurt your business operations?)
• Do the repayment terms make sense for the type of loan? Are you able to make monthly payments with ease?
• Did you receive the best competitive rates considering the type of loan, your credit, and the lender’s underwriting criteria?

Quite often, when a small business owner applies for business equipment financing, they’re focused on one element over another. For instance, you may have been focused on the length of the loan instead of the interest. Or, maybe you were more concerned with the actual equipment costs and didn’t consider other factors. Many business owners simply need to get the equipment quickly so their business meets its operational potential.

How a Lender Determines Business Equipment Financing Terms

Once you’ve decided to evaluate whether or not you’ve gotten the best financing deal for your new equipment, it might help to know what a lender looks for. A lot of it has to do with the lender’s underwriting criteria. Many lenders will evaluate the following:

• How long you’ve been in business
• Your credit history, including your business credit score and personal credit score
• Whether or not you have enough cash flow or working capital to meet the repayment terms and the rest of your business expenses
• Your business’s financial statements, including tax returns
• Type of equipment being purchased with the loan funds
• How much downpayment you can put down if it’s required
• The loan-to-value (LTV) ratio of the equipment being financed

While it might be challenging for you to be as objective as a lender about most of the underwriting criteria, your equipment’s loan-to-value-ratio is a standard calculation that provides more insight for both small business owners and lenders.

What Does Loan-To-Value Mean?

Let’s start with a working definition. Loan-to-value (LTV) measures the ratio of a loan to the value of whatever asset (in this case, equipment) the loan is funding. To get the ratio, you divide the loan amount by the value of the asset.

The lender uses the value of the equipment to determine what is called the borrowing base, which is the amount of money a company can borrow.

For business equipment loans, the borrowing base is calculated using a percentage of the market value of the equipment – called the discount factor – which can be as high as 50%.

A great thing about the LTV ratio is that it isn’t industry-specific; it can be used in gas station financing, hospitality financing, and restaurant financing. It’s also utilized in real estate loans.

No matter what industry you’re in, if you are looking for an equipment loan, the LTV is relevant to your interests. The lower the ratio, the better. To find out why, keep reading.

How Business Equipment Financing Depends On the LTV

The main factors that impact the LTV ratio are down payment, sales (contract) price, and appraised value. To achieve the lowest LTV ratio, you could raise the down payment and negotiate to lower the sales price.

For example, suppose you buy a piece of equipment that is appraised at $200,000, and the owner is willing to sell it for $190,000. If you make a $20,000 down payment, your loan will be for $170,000, resulting in an LTV ratio of 85% ($170,000 / $200,000).

If you increase your down payment to $30,000, your loan will be $160,000, making your LTV ratio 80%. The lower the LTV ratio, the greater the chance your loan will be approved, and the lower the interest rate is likely to be, which is better for your business.

Once the lender has determined the amount they’re willing to finance, they’ll present you with the loan terms. The length of business equipment financing loans can range from one to seven years, depending on the type and value of the equipment.

The Annual Percentage Rate (APR), or the amount of interest you pay, can depend on the size of the loan, the type of equipment, and your company’s business credit. Generally, the longer the loan term, the lower the APR, and vice versa.

What If I’m Not Happy With My Current Business Equipment Financing?

It’s not uncommon for new startups to make a rookie mistake and finance equipment with a shorter life span than the length of the loan. Or maybe you’re a solid six months into paying back your loan and have started looking around to find better terms with business equipment financing companies. When interest rates change, it can also feel like you got a bad deal if the current rates are lower than you were previously quoted.

Whatever your scenario, if you’re not happy with your current loan, it’s time to look into refinancing. There are various considerations regarding this. First, you’ll want to get a copy of your credit report to make sure nothing’s changed or gone South since the last time you applied for a loan.

Once you’re confident your credit can help you get the best deal when refinancing your loan, it’s time to choose which type of lender you’ll go through. Equipment refinancing is a very specialized type of business lending, so not all lenders will have this as an option. Equipment refinancing is available through various lenders, including traditional banks, commercial lenders, and alternative lenders. So you’ll need to explore these routes to see which one gives you the best deal for your business needs. You’ll need to look around for these options.

It’s in your best interest to get multiple quotes. Once you have a few quotes to compare, you might need to consider questions like whether you should keep the same length term but at a lower APR. Or whether you should lengthen payback time even more, so you can lower your monthly payments and open up your cash flow. With several refinancing options, you can weigh the pros and cons of each package.

Banks and Traditional Commercial Lenders

While traditional banks and other traditional commercial lenders like credit unions often offer the widest variety of business equipment financing with the best terms (i.e. lower interest rates, more repayment options, and so on), these great terms typically come with strict requirements.

Although it’s easier to qualify for an equipment loan than an unsecured loan because it’s asset-based (built-in collateral in case you default), these financial institutions still strongly consider the creditworthiness of your business.

Bank loan APRs can be fixed or variable, with the percentage depending on the loan amount, the loan term, and your company’s credit standing. Many banks can structure the loan based on the useful life of the equipment with a repayment schedule that’s compatible with your company’s cash flow.

Non-Bank Lenders

Alternative lenders, or online lenders, provide an avenue for easy equipment financing. Companies that can’t qualify for a bank equipment loan can usually qualify through an alternative lender. However, in some cases, particularly for bad credit, there can be higher interest rates on the loan.

In some cases, alternative lenders will focus more on the length of time a business has been operating and its annual revenue, than on the business’s credit score. This can help small companies that have been in business for a long time.

Over the last few years, the number of non-bank equipment lenders has increased, with many of these lenders willing to take on business equipment financing that originated at a traditional bank. A primary advantage of working with a non-bank lender is that they may offer greater leniency and more flexibility in applicants’ credit qualifications.

Generally, the application and approval process with a non-bank lender is much shorter than it is with a bank. Often it can even be completed in a matter of days, instead of the weeks or months it can take with a bank, making the alternative refinancing path a good option for companies that need to move quickly.

Bottom Line: Getting a Good Deal on Your Equipment Loan

The bottom line is that you should feel you were treated fairly and get business equipment financing that seems to work for you. If you’re struggling to make payments, maybe it wasn’t the best deal. Or, if you’ve calculated that your loan equipment’s useful life will likely occur before the end of your loan, it could put you in a bind.

It’s paramount for you as a small business owner to have access to a small business equipment loan when you need it. Efficient equipment can be the difference between running a successful business and closing a failing one.

Any small business loan you take out should be the best deal for your business. Just ask Gauntlett Eldemire, who’s had multiple loans with Biz2Credit to grow and expand his laundry business. Biz2Credit has worked with small business owners in multiple industries to help them get financing.

FAQs about Equipment Loans

What is a typical loan term for business equipment financing?

Different loan providers will have their own terms, which can range from a year to seven years. However, the term of the loan should never last past the expected life span of the equipment financed.

What type of interest rate can I expect with an equipment loan?

Once again, this isn’t a one-size-fits-all approach. Many factors, including your credit, length of time in business, loan-to-value ratio, and more will impact your loan’s interest rate. It can vary from 5% to 30%.

What type of credit score do I need for business equipment financing?

This depends on the lender, but you won’t need as high of a score as you would with other types of small business loans. However, the better your credit, the more favorable your interest rate will likely be for your equipment loan.

Are there other types of equipment financing besides bank loans and alternative loans?

Yes, some small businesses use their business credit card or get a business line of credit to purchase equipment needed for their business. An SBA loan is another option, although you still have to go through a traditional lender for SBA financing. Revenue-based financing or term loans through an alternative lender are other options.

If I’m still not sure what’s the best equipment loan deal for my business, what can I do?

Many small business owners feel more confident after consulting with a small business loan provider who understands the ebbs and flows of their industry. Biz2Credit is an online small business financing company with 17 years of experience, having supplied financing for more than 200,000 small business owners.

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