The ABCs of business-equipment loans

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Ask a Lender
February 9, 2017 | Updated September 26, 2017


Key Points

The basics of equipment loans

  • Traditional banks and online lenders offer equirement loans.
  • A down payment of 20 percent may be required.
  • The SBA 504 loan program is a good option for startup businesses.
  • Traditional lenders typically require good credit and a solid business plan.

At some point, most companies need to acquire or replace equipment. They also have to figure out how to pay for it.

One common way to buy or upgrade your company’s equipment is through a loan. Large banks and several other traditional and nontraditional lenders offer lending programs that will finance the vast majority of the equipment costs.

Loan limits

As a general rule, lenders won’t loan the entire cost of an equipment purchase. The business typically has to make a down payment of roughly 20 percent on a purchase. Compare this to little or no down payment on a lease agreement.

There are exceptions to this rule, however. Some lenders offer to finance the entire equipment purchase with a five-, seven- or 10-year loan with fixed monthly payments. One nice thing about an equipment loan is that the approval process tends to be quicker than with a real estate purchase. The business can get the use of the equipment almost immediately.   

Most aspects of an equipment purchases are financeable, including the installation, delivery and other soft costs. Some lenders finance up to 25 percent of these soft costs.

SBA 504 loans 

If you’re a small business, a good option for financing an equipment purchase is the U.S. Small Business Administration’s 504 loan program, or SBA 504. The loan program is open to businesses with a tangible net worth of less than $15 million and average net income after taxes of less than $5 million. Companies engaged in speculation or that invest in rental real estate are not eligible, however.

Like most other government programs, the SBA doesn’t lend the money out, but works with a network of lenders. Your business would apply through an approved lender, which would determine whether you meet the SBA’s guidelines.

SBA 504 loans can be used for a number of purposes, but one of them includes equipment or machinery purchases and upgrades. The program is a good option for a business that is just getting started and can’t get financing from a traditional bank. One of the advantages of the program is that the interest rates are competitive because the government is backing the loan.

SBA won’t finance equipment loans if the business or its owners have the means to finance the purchase on their own, however.

Good credit 

SBA programs have rigorous underwriting requirements. You’ll be asked for your resume, your business plan and to provide statements that demonstrate your ability to repay the loan.

SBA 504 loan thresholds also are tied to the number of jobs your business creates or retains. According to the SBA’s guidelines, as of early 2017, a business must create or retain one job for every $65,000 in financing provided by the SBA. Small manufactures have to create or retain one job for every $100,000 lent out for the program.

Generally speaking, you’ll need good credit to obtain an SBA loan or an equipment loan from a traditional lender. Borrowers should also come armed with a solid business plan, your cash-flow statements, the resumes of all the business owners and references.

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