5 Ways to Get an Equipment Loan
Whether you’re paving a road or writing software, sooner or later you’re going to need to buy, upgrade, or replace your business-related equipment. Unless you’re lucky enough to have a lot of cash on hand, the costs of doing so out of pocket may prove prohibitive. If you don’t have the luxury of waiting, you’ll need to seek some kind of equipment financing.
So where should you start looking?
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1. See what your bank or credit union has to offer
When you’re looking for financing, you first stop should usually be the institutions you deal with on a regular basis. If they make a habit of working with small businesses, they may offer specialized financial services for certain types of equipment.
The advantage of dealing with your local financial institution is that you’ve probably already developed a working relationship with them, even if all you have are basic savings and checking accounts. Since finance is largely about managing risk, the fact that you’re a known quantity to the bank can translate to better rates.
Of course, if you’re frequently overdrafting or have cash flow issues, being known can backfire on you.
2. Investigate independent equipment funders
Banks may or may not offer equipment financing, but there are funders who specialize in equipment financing.
These companies frequently cultivate relationships with vendors and manufacturers, allowing them to–in theory–offer competitive rates on new and used equipment. Just be aware that many don’t offer traditional equipment loans, though they do offer something very similar.
3. See if the manufacturer offers financing
After the financial crash, credit was hard to come by for many individuals and small businesses. While banks can afford to be conservative with their lending, equipment manufacturers don’t have that luxury. If they don’t make sales, they don’t make money.
As it happens, many of these manufacturers directly offer financing. Companies like General Motors have dedicated financing divisions that offer leases and loans through their dealers.
4. Consider an equipment financing agreement (EFA)
If you need equipment fast, traditional equipment loans aren’t your only option. Depending on the circumstances, they may not even be your best option. If a traditional equipment loan proves elusive, there are alternatives.
One of the more common ones is the EFA. An EFA is kind of a hybrid loan-lease. The language of the agreement is very similar to that of a lease: you’ll still be making monthly payments, your downpayment will probably be the first and last month’s payment, and no collateral will be necessary. The agreement, however, is between a lender and a borrower rather than a lessor and a lessee. What this means, in practice, is that you’re getting a $1 buyout lease that absolves the lender of any liability they have for maintaining and repairing the equipment.
From the borrower’s perspective, there are also some advantages. As mentioned above, you’ll be able to avoid the liens that tend to accompany loans, and you’ll likely be able to get the financing quicker. Lease payments can also sometimes qualify for tax deductions.
5. Consider a $1 (or $10) buyout lease
When we think of leases, we tend to think of fair market value (FMV) leases. These agreements are for customers who want to temporarily rent a depreciating asset from a lessor and then have the option of either buying it or returning it at the end of the term.
But leases are more versatile products these days. A popular way to finance equipment is through buyout leases. These leases assume that the lessee wants to own the equipment at the end of the term rather than return the equipment, although that may still be an option. In practice, that means higher monthly payments, but at the end of the term you’ll have the option to buy the equipment for $1.
If you’re willing to think outside the box and investigate some of the avenues discussed above, you should be able to find financing that meets your needs and circumstances. If you want a head start, check out our equipment financing reviews.