Equipment Financing Alternatives | Bankrate

Equipment loans can be a good way to finance equipment at affordable rates. However, they’re not always the right, best or most accessible option. 

Depending on your circumstances, you may be able to get a loan with better terms, a quicker approval time, lower rates or even without the need to put collateral on the line. 

If you’re exploring equipment loans, consider these alternatives before taking out a loan. 

Alternative equipment financing options

Term loan

Term loans work similarly to equipment loans in that you get a lump sum upfront, then repay the principal plus interest over a specific period. But you don’t have to back the loan with the equipment — you can use other assets or choose an unsecured loan.

A variety of lenders offer term loans, and you can use them to purchase any business-related expenses. This includes equipment purchases, such as restaurant or office equipment or semi-trucks.

You can borrow from a bank, credit union or online lender. Online lenders tend to have more lenient requirements to apply and fast funding within 24 to 48 hours, while banks and credit unions have strict requirements but offer the best interest rates. Be aware of the fees lenders charge in addition to interest. Since term loans can be unsecured, your interest rates may be higher than an equipment loan.

Be aware of the fees lenders charge in addition to interest. Since term loans can be unsecured, your interest rates may be higher than an equipment loan, though they can still come with lower interest rates overall when compared to other unsecured loan types. They also tend to come with fixed interest rates and monthly repayments, making your repayment schedule predictable and more manageable.  

Equipment line of credit

Like other business lines of credit and business credit cards, an equipment line of credit gives you a set credit limit that you can draw from as needed. You only pay interest on the amount you spend, and your limit is replenished as you pay back your line. Equipment lines of credit are secured by collateral, so you may qualify for a lower interest rate than you would on an unsecured line.

The downside is that you can only use the funds for equipment, and not for any other day-to-day expenses. This makes it significantly less flexible than a line of credit that does not require collateral.

If you’re looking to buy equipment and cover other expenses, you may want to consider an unsecured business line of credit instead, though this may come with higher interest rates and credit requirements and lower limits than a secured line of credit. 

SBA loans

If you have exhausted other forms of financing, the Small Business Administration (SBA) has a handful of government-backed small business loans that can be used for equipment.

• 7(a) loans. The standard option, a 7(a) loan, is a term loan that can be used to cover many business-related expenses, including equipment purchases.
• 504 loans. A 504 loan is the most similar to an equipment loan. They are intended for most major fixed assets that grow your business, like equipment.
• Microloans. The SBA Microloan program is for businesses looking for smaller funding amounts. The maximum microloan amount is $50,000, so it’s a good fit for inexpensive equipment and small purchases.

Overall, SBA loans have competitive rates but may take longer to apply for and fund than other alternatives you may be considering — as long as 30 to 90 days. 

You can apply for SBA loans through SBA-approved lenders and nonprofits offering the different types of SBA loans. SBA Preferred Lenders can also expedite the loan approval process since they don’t have to get direct SBA approval.

Equipment leasing

Equipment leasing allows you to rent equipment rather than buy it directly, offering a low upfront cost and low monthly payments, which may help reduce your risk of default. They can also cover incidental costs such as insurance and maintenance, the burden of which would be on equipment owner if you were to take out a loan. In addition, it allows you to upgrade your equipment without being on the hook for depreciation. 

There are two options for leasing equipment: operating and capital leases.

• Operating leases. An operating lease does not transfer any ownership of the equipment. Instead, your business uses it for the duration of the lease and returns it at the end of the lease period. This short-term option leads to lower payments and can help give your business access to expensive equipment it might not otherwise be able to afford.
• Capital leases. A capital lease allows your business to purchase the equipment at the end of the lease period. Unlike an operating lease, you can claim both the depreciation and interest as tax deductions. And for tax purposes, you are considered the asset’s owner for the lease’s duration.

Keep in mind that when leasing equipment, you will be held liable for damage or destruction of the equipment, and may be charged the value of the equipment and additional penalties.

Business credit cards

Business credit cards allow your company to be approved for a set credit limit, and you charge purchases to it as needed. You’ll only pay interest on the current balance. As you pay back the current balance, your credit limit resets, allowing you to borrow again as needed up to the limit.

A business credit card may have a higher interest rate than traditional business loans, such as an 18 percent to 35 percent APR. The rates are also variable, so they may change at any time, and they generally come with lower borrowing limits than a line of credit or term loan. 

Business credit cards may come with perks, such as cashback, travel rewards or a 0 percent APR interest offer. And if you pay the balance in full each month, you’ll receive a grace period of at least 21 days in which you can pay back the amount you borrowed, interest free. They can also be a good avenue for building credit, so long as you make the payments on time. 

Crowdfunding

Crowdfunding is a way for businesses to raise money by relying on contributions from the general public. 

There are a few types of crowdfunding, including donation, reward and equity. 

• Donation-based crowdfunding solicits donations that you don’t have to pay back. Some crowdfunding platform may require you to surrender donations that don’t meet a funding goal that you set ahead of time. 
• Reward-based crowdfunding solicits donations in exchange for rewards such as products, swag, gift cards or business expansions. You’ll be expected to deliver the rewards in a timely manner after funding is achieved. 
• Equity crowdfunding gives backers partial ownership of your business in exchange for donations. 

While crowdfunding can be a good way to drum up support and finances, there are a few factors to be aware of. 

You’ll need a strong personal network or crowdfunding community that is interested in your business. Some crowdfunding platforms like Kickstarter won’t give you any funds unless you reach your fundraising goal. Since you’ll need to build awareness and buzz around your brand, this type of financing doesn’t work well if you’re looking for a hands-off form of financing.

Once you achieve your goal, you’ll be expected to deliver on your promised rewards. Failing to fulfill your promises to backers will not only generate bad will, but possibly open you up to fraud lawsuits or civil penalties. 

Finally, be sure to consider the tax implications. Depending on the nature of the crowdfunding campaign, your funds may be taxed as business income. 

Angel investors

Angel investors are private investors who are willing to take on riskier bets. In exchange for their investment, they usually ask for equity in the business and may want say in how the business is run. If your business fails, they risk losing their entire investment. If you succeed, they will maintain part ownership of the company per the terms of the contract. 

While an angel investor may offer decent terms and an appealing opportunity, be mindful of how much equity you’re giving up, especially if the investor’s ideals or plans don’t align with the direction you want to take your business. 

The upside is that you can get a business partner with experience in the market who will offer you mentorship and connections to make your business succeed.

Bottom line

Your business doesn’t need to rely solely on an equipment loan to make a purchase. There are a variety of equipment financing options available — including term loans, lines of credit, equipment leasing and SBA loans — that can cover equipment. Whichever option you choose, take the time to compare the best small business loans for you and reach out to multiple lenders for quotes.

Frequently asked questions

• Is it better to buy or lease equipment?

  Leasing equipment is an accessible option for business owners who may not qualify for business loans or have enough money saved for a sizable down payment. It’s also a good choice for businesses in industries that frequently see improvements in technology. But if your business will use the equipment for a long time and doesn’t need the newest equipment, you may want to purchase the equipment so you own the asset.

• Is it better to finance or pay cash for equipment?

  It depends on the goals and overall cash flow of your business. Financing equipment is a better option for businesses that can’t afford the sizable upfront costs needed to purchase equipment or that would like to keep capital on hand. But if your business can handle paying the entire cost up front, paying cash for equipment will result in lower overall costs since you’ll avoid paying interest.

• What is the average interest rate on equipment loans?

  The business loan interest rates start at 7.31 percent for loans from banks and 9.00 percent for online lenders, but those rates are reserved for borrowers with excellent credit and strong business financials. If you have fair or bad credit, you could see rates as high as 99 percent. Interest rates on any business loan vary considerably based on several factors, including the amount of time you’ve been in business and your cash flow.