Businesses of every variety and in every industry need equipment, and even when you are able to purchase it up front, it can cause a major dent in your cash flow. More often than not, financing is a better option. Overall, the financing process is relatively the same whether it is industrial or commercial equipment loans. In this article, you will read about the process of obtaining an equipment loan and the concept of industrial vs commercial.
What Is the Difference Between Industrial and Commercial Equipment?
An industrial business is one that involves the manufacturing of goods. It can refer to industrial construction businesses or factories that manufacture products to be sold by commercial retailers. This type of business requires a variety of equipment to produce the goods and the assets to store them. The equipment needed varies from industry to industry and business to business, but some common examples include:
- Industrial coolers
- Computer numerical control (CNC) machine
- Machine press
- Food packaging and assembly
- Box makers and box sealers
A commercial business refers to businesses that serve customers directly. They are designed to be attractive and appeal to the consumer in order to drive revenue and create a profit for the owner. Nothing is produced or manufactured.
What Is an Equipment Loan?
Equipment loans are typically a financing option for small businesses specifically used to purchase equipment needed to run your business. The equipment can range from small bundles of kitchen appliances to heavy, industrial machinery. For example, new restaurants need a number of commercial kitchen equipment, and manufacturers often open new factories and prefer to purchase industrial, manufacturing equipment through a loan to keep a steady cash flow.
How It Works
The terms of an equipment loan vary across lenders, but you can expect a predetermined amount that includes interest and principal over a fixed term. Much like an auto loan, the equipment you purchase acts as collateral for the loan. Therefore, if you fail to make payments, you risk repossession. Under certain conditions, your lender may require a personal guarantee in the form of a personal asset, or place a lien on other business assets.
The qualifications required for an equipment loan vary by industry and lender, but some general factors that lenders consider include:
- Your business or personal credit history
- How long your business has been in operation
- Your annual revenue
- Your business plan
Banks usually require stricter requirements and use a more intensive vetting process. If you need financing quickly, online lenders are likely the better choice.
Most lenders require at least one year in business, a minimum of $100,000 in annual revenue, and three months of recent business bank statements to qualify for industrial equipment financing. Loan terms and interest rates also vary by the lender for commercial equipment. Depending on your needs and the results of the lender’s risk assessment, you can expect interest rates between 2 to 20 percent and loan terms up to 10 years.
Benefits of Equipment Loans
In comparison to other forms of financing, equipment loans have several advantages:
- The qualifications are not as strict as a traditional term loan because the equipment acts as collateral for the loan.
- Depending upon the terms of the loan, you may be able to record the equipment purchased as a tax deduction. This is also a possibility should you decide to lease instead of purchase.
- The rates are usually more favorable than a traditional loan or line of credit.
- The application process requires less time and less paperwork.
- You can anticipate a faster turnaround, which means you receive the money faster.
- An equipment loan allows you to maintain the cash and capital that you have and lessens the need to withdraw from a business line of credit or use a business credit card.
Of course, as with all types of financing, there are some potential disadvantages.
Disadvantages of Equipment Loans
The benefits of equipment loans significantly outweigh the downsides. Some potential downsides include:
- The term lengths are sometimes significantly longer than the lifespan of the equipment. If the equipment that you purchase is used heavily and regularly, you may find yourself making payments on it long after it has expired. This can easily be avoided by assessing the anticipated use of the equipment before confirming the terms of your loan.
- In most cases, the equipment you purchase will act as the only necessary collateral for the loan. However, under certain circumstances, the lender may ask for an additional guarantee in the form of business or personal assets. This is possible if your business has no credit history or a low credit score.
- Lenders sometimes require a significant down payment. However, the down payment for an equipment loan is typically much lower than what is required for a traditional loan.
Fortunately, there is a way to avoid these disadvantages.
How Is Equipment Leasing Different?
There are a number of reasons that an equipment lease is likely the better option. For example, if:
- Your business uses equipment that requires consistent repairs or has to be replaced frequently
- The equipment you need has a short average lifespan
- You do not plan to use the equipment as a mainstay in your operation
- You do not have the cash flow for a significant down payment
The main difference between an equipment loan and an equipment lease is ownership. Under a loan, you immediately retain ownership of the equipment, which also means that all maintenance, repairs, and disposal are your responsibility. Under a lease, the lessor retains ownership of the equipment.
When a lease ends, the lender will typically give you the option to purchase the equipment at a discounted price, lease the same equipment again, or turn the equipment in. This is a particularly convenient option if you want to consistently upgrade your equipment.
If you need a fast way to purchase equipment for your business, an equipment loan or lease is a great way to get borrowed capital without compromising your cash flow. For more information, contact the experts at Platform Funding.