When you need equipment for your small business, choosing the right lender can help you get the money you need and avoid pitfalls from inappropriate loans or unscrupulous lenders. In this article by Excelsior Growth Fund, we explain some important differences; before you approach a lender, it’s wise to prepare for the application process, too, so we cover some of those steps as well.
1. Review your credit history and clear up any issues.
One of the key considerations for lenders is the creditworthiness of the business owner(s). Even if your credit is less-than-perfect, there are loans available (you’ll learn more about that further in this article), but it’s a good idea to clear up issues in advance of applying for a loan. Review your credit reports, correct any errors and pay any outstanding bills. (Get more tips on how to improve your credit score here.)
2. Create a list of your business's equipment needs and research the cost and useful life of each item.
When making loans for equipment purchases, lenders will consider cost and useful life – the generally accepted standard for how long each piece of equipment can be expected to be in service – to ensure that lenders don’t make loans that outlast the life of the equipment.
Before you apply for a business loan to finance your purchases, research your equipment needs and the costs and useful life of each piece. (For more information and a list of the IRS’s determination of useful life for some types of equipment, see this from Investopedia.com.) This will help you ensure that the amount you borrow and the term of the loan are appropriate.
3. Determine your financing options.
Small business loans are available from a variety of sources, from traditional banks to non-bank alternative lenders, although not all loans will cover all equipment.
This list is a snapshot of lenders, allowable uses and some advantages and disadvantages for each:
Generally, banks lend based on a business’s cash flow, not on the value of the equipment. For this reason, while bank loans can be excellent options for established businesses, the lack of revenue and financial history means that startups usually don’t qualify.
Pros: Can be used for small and large equipment purchases, with lower interest rates and advantageous repayment terms
Cons: Requires strong credit and financial history; generally, not available to startups or to businesses and business owners with weaker credit histories
Small Business Administration
The U.S. Small Business Administration (SBA) doesn’t directly make loans; instead, the SBA provides guarantees to lenders (banks and approved non-bank lenders) to incentivize them to lend to small businesses. SBA programs include microloans for small equipment purchases (under $50,000) and 7(a) and 504 loans for large equipment (where total project costs can exceed $10 million).
Pros: SBA-backed loans work well for many small business needs and come with competitive rates and terms; can work for startups and borrowers with imperfect credit; easier to qualify for than traditional bank loans; good interest rates and repayment terms; range of loans to cover small and large equipment
Cons: Longer application and processing time than some alternative lenders; requires personal guarantees on the loan and, sometimes, additional collateral
Community Development Financial Institutions (CDFIs)
CDFIs include mission-based lenders including nonprofit organizations and sometimes credit unions that specialize in underserved small business populations such as women, minorities and low-income entrepreneurs. CDFI loans are generally made for working capital purposes, of which the equipment purchase is an allowable use.
Pros: Easier qualification; shorter loan-processing time; longer repayment terms; often, CDFIs offer a range of educational programs and other support for small business borrowers
Cons: Loan maximums generally don’t exceed $100,000; may have higher costs than traditional banks or SBA-backed loans (but are still less than most asset-based or non-bank alternative lenders)
These lenders, including peer-to-peer financers, don’t specifically fund equipment; instead, they fund working capital needs. They are considered cash-flow lenders, meaning that they make loans based on a business’s daily or weekly receipts.
Pros: Easier to qualify; shorter processing time
Cons: Loan maximums generally don’t exceed $100,000; Very high interest rates and short repayment terms (often with weekly or daily repayments) can make the loans very difficult for small businesses to manage; because of the aggressive terms, these loans are discouraged
Business equipment leases
Leasing is a great alternative to purchasing equipment for many small businesses. You don’t have to come up with the full purchase cost and lease payments are often lower than loan payments would be for the same equipment, because you’re essentially paying to borrow use of the equipment. The leases available include operational leases and capital leases, with different tax implications. (For more about that, talk to your accountant or tax advisor.)
Pros: Lower payments than loans for the same equipment; the option to purchase at the end of the lease, to return the equipment or to lease new equipment
Cons: Typically, higher overall costs than outright purchases; startups may need to provide personal collateral for lease approval
The best equipment loan for your business will be determined by a combination of your business/personal creditworthiness and the type of equipment. If you’d like advice and further guidance before you move forward with your loan application process, contact EGF to learn how we can help.
About Excelsior Growth Fund
Excelsior Growth Fund (EGF) helps businesses in New Jersey, New York and Pennsylvania grow by providing streamlined access to business loans and advisory services. EGF’s signature product, the EGF SmartLoan™, provides up to $100,000 in fast, transparent, and affordable financing through a secure online platform. Larger loans up to $500,000 are also available. EGF is a nonprofit organization and is certified by U.S. Department of Treasury as a Community Development Financial Institution (CDFI). Learn more at www.excelsiorgrowthfund.org.