• Small businesses that need financing to pay for their equipment can consider an equipment line of credit.
  • Unlike a traditional small business loan, a commercial line of credit allows the borrower to pay interest only on the amount they use.
  • Borrowers can also reuse the credit once they have repaid it.

What is an Equipment Line of Credit?

An equipment line of credit is a small business loan that lets you only pay interest on what you use. It also allows you to reuse the credit after paying it back. Instead of getting a lump sum, you get a pre-approved spending limit that can be used whenever you need it, much like a credit card.

Using a line of credit to finance your equipment can be a great option over a traditional small business loan for a number of reasons:

  • You can reuse the funding. Unlike many loans, a line of credit is “revolving,” meaning you can access it again after you pay it off.
  • Interest does not accrue immediately. Unlike many loans, where you have to repay the set interest rate with each monthly payment, a line of credit only pays interest on what you use.

Advantages and disadvantages of equipment financing

There are a few pros and cons to using financing to buy or lease your business equipment.

Should your business lease or finance equipment?

There is an alternative to outright buying equipment either with your own money or financing: leasing.

With equipment leasing, you rent equipment from a supplier or manufacturer for a contractual term. At the end of the lease, either you own the equipment or you return it. Similar to equipment financing, leasing allows you to spread the cost of equipment over a longer period rather than paying a lump sum upfront.

Other benefits of equipment rental include:

  • Maintenance and repairs are the responsibility of the equipment owner
  • You may be able to upgrade your gear more easily than if you owned it, giving you more flexibility
  • Gives you more flexibility than finance with multiple lease options and timeframes
  • Faster approval than traditional financing
  • Easier to get with bad credit than equipment financing because it’s less risky for the lender

When deciding between financing and lending equipment, consider the type of equipment you are trying to obtain and your business needs. If you are starting a new business and want to acquire new equipment, leasing may be a better option than financing, as you are more likely to qualify with little or no business history, especially if you have no not good business credit or good personal credit.

What does your business need to qualify for equipment financing?

The types of loans available to you will depend on a number of factors. As with any type of financing, you will need to meet a few requirements in order to qualify for equipment financing:

  • Credit history. You will need both your business credit score and your personal credit score to qualify for a term loan, line of credit or other type of financing. Online lenders may accept lower credit scores than traditional banks or credit unions, but this may mean higher interest rates or shorter loan terms. Not sure about your business credit score? Learn how to establish and improve business credit for a better chance of qualifying.
  • Years of activity. Traditional lenders and Small Business Administration (SBA) lenders will likely want to see that you have several years in business in order to approve your financing. Alternative and online lenders may be willing to forego this in exchange for higher interest rates and shorter repayment terms. You can also consider small business start-up loans which have less rigid requirements for years in business.
  • Financial. Make sure you have your tax returns, proof of annual income, bank statements, and other financial statements ready when applying for a bank loan or other type of business financing. These will help the lender determine your level of risk, which also determines your eligibility, loan amount and repayment terms.

Equipment loan interest rates and terms

Interest rates and terms for equipment loans vary depending on the lender you choose, as well as your credit score, years in business and other factors.

With good credit, you may qualify for a loan at 5% interest with a repayment term of 10 years. With a lower minimum credit score, a short term loan may be more likely. Interest rates can be as high as 30%, which may not be worth it, depending on the equipment you are financing.

How to finance your commercial equipment

There are several ways to finance your professional equipment, depending on the needs of your business:

  • Traditional equipment loans from banks or credit unions
  • SBA Loans
  • Online lenders
  • Equipment lines of credit
  • Small Business Credit Cards
  • To pay cash
  • Crowdfunding

Industries that use equipment financing

You can find equipment financing in any industry that uses equipment, such as:

  • Transportation, such as tractor-trailers, vans, and fleet vehicles
  • Agriculture, such as farm equipment and animal control equipment
  • Healthcare, including dentistry and other medical specialties
  • Restaurants, including kitchen equipment like ovens and stoves
  • Manufacturing, including heavy equipment for production plants
  • Construction, including demolition equipment and other equipment

Where can you get an equipment line of credit?

This list of equipment financing options is a good starting point for finding an equipment line of credit or other equipment financing. Here are some line of credit options you might consider:

To find the best equipment financing, it’s a good idea to know your business and personal credit scores, as well as what you’re likely to qualify for. Nav can help you find your best options based on your business data. Register for a free Nav account to see your options for equipment financing and other small business loans today.

This article was originally written on June 30, 2022.

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