Equipment Loans For Startup Businesses: Financing & Requirements
Say the word startup, and many will think of young guys developing software in San Francisco, but the reality is any young business is a startup. Whether your new venture is a restaurant, an auto shop or indeed a software company, for the first few years you will be a startup. Those first years often dictate whether a business will be around for the long haul or die.
The biggest problem for any startup is finance. With no trading record to speak of and little in the way of a business credit history, lenders often won’t give you the time of day. Yes, you know your business has a strong future ahead, but lenders often aren’t willing to help in your first two years.
There is one major exception, however: an equipment loan.
What Is an Equipment Loan?
An equipment loan or leasing agreement allows you to borrow money to purchase equipment. That loan is then tied to that equipment, so if the business fails, the lender can simply take the equipment back. If it’s a leasing agreement, it works in the same way as a car lease, where you pay for the equipment monthly.
Let’s have a look at what equipment loans are available for startups in more detail.
How to Get Equipment Loans for Startups
All you have is an idea, enthusiasm, and a little capital gathered from savings, your family and credit cards. Maybe you’ve even started trading, and are ready to take the next step. What you don’t have, however, is an extensive track record showing years of revenue.
However, the great thing about equipment loans is that the equipment itself acts as collateral, providing the finance company with some sort of insurance that most of their loan is recoverable should you default. This means that even startups have a high likelihood of having an equipment loan application accepted.
With an equipment loan, you can get all the machinery, vehicles and furniture you need to be competitive and profitable in your industry.
Credit Requirements for Equipment Loans
As far as the credit aspects for startup equipment loan requirements are concerned, they are not as stringent as that for more traditional finance options, but there are still some standards you have to meet.
While you may not need a perfect credit record, most loan companies will need to see a personal credit score of at least 600, though 700 plus should be your goal. This may vary depending on the business sector you are in. They will also expect little or no recent problems with paying bills, repaying credit cards, and so on.
You may or may not have to include a personal guarantee with your equipment loan, depending on the lender and what you’re borrowing for. Generally, however, the equipment acts as collateral, and you simply need to prove you have a history being good with finances.
How Does Equipment Financing Work for Startups?
Borrowing money is always difficult for startups, and equipment financing is often the only option for getting the cash you need to get your project up and running. Good quality equipment is a drain on startup resources, and an equipment loan or lease could enable you to get the sort of grade of equipment that allows you to compete with the best. Having to make do with old or obsolete equipment often means you are playing catch up with your competitors, and your business may not survive a slow start.
Because you are buying assets, loan companies know that their money is relatively safe. Should your business get into financial difficulty, they will have the equipment to sell, removing most of the risk. This is why startups are often eligible for equipment loans where they would be turned down for other financial products.
There are two options for startup business equipment financing: loans and leasing. The terms are often used interchangeably, but both types of finance are quite different from each other and should not be confused.
- Startup equipment loans are simply installment loans. You work out the cost of the equipment you need, provide a down payment, something in the region of 15% is the norm, and the finance company lends you the rest. This amount, plus interest, is then paid back, usually monthly, over the term of the agreement. Because the money is provided for tangible assets, the interest rates are often quite competitive.
- Equipment leasing terms vary significantly, so you need to research what equipment leases in your industry are like. In some, the business is regarded as the owner of the purchased equipment. In others, it is the finance company. It’s always a good idea to talk to an accountant as there are serious tax implications that you need to understand. The main financial advantage of a lease rather than a loan is you don’t normally need to find that 15% down payment, which is obviously difficult for startups.
Just like loans, leases spread the cost of the equipment purchased over the term time, but not all of it. There is usually a residual amount to pay at the end, which may be a figure approaching the used value or almost nothing, depending on the terms of the lease. Operating leases usually operate over a short period, have a large residual but also give you the option to return the equipment rather than buying it. On the other hand, capital leases are much closer to loans, the residual may be as low as $1, and you end up as the sole owner of the equipment.
Why Are Equipment Loans & Leases Good Options for Startups?
Now that you understand how equipment financing for startups works, let’s look at the pros and cons.
Pros: Why your startup should get equipment finance
If you are a startup, any other finance is hard to find. Until you have been in business for 2-3 years, banks and other lenders will not consider you for a term loan, and even a business line of credit needs six months and a healthy turnover. Equipment finance may be your only option.
- No collateral is needed.
- Qualification is relatively straightforward. Because the risks for the lender are low, they tend to be more generous with their qualification targets and may be flexible. For instance, if you pay a bigger down payment, the requirements may be relaxed.
- An operating lease will allow you to simply return the equipment when the agreement is at an end, which is good news for much high-tech equipment that is quickly superseded.
Cons: What your startup should be wary of
- Finding 15%, and sometimes more, of the price of a big-ticket item may not be straightforward for a startup. While leasing may remove this problem, you may find that option too expensive.
- Repossession is a real danger if you have any problems making the repayments. If the item repossessed is vital to your business, you will be in real trouble.
- Equipment finance is not always cost-effective and can be quite an expensive form of raising capital. Make certain you know exactly what the whole outlay will be before you go ahead. This is particularly true of leases where the agreements can be quite confusing.
- Leasing can be a bit of a minefield. You need to take as much advice as you can get before any agreement is signed to make certain you have the right package for you and your startup. There are tax implications that need to be understood if you are to get the best deal. And take note that the vendors of the equipment you are hoping to purchase want to provide that financing. Don’t get pushed around to make a deal you may regret later.
The Best Options for Equipment Loans for Startups
There are many options on the market for startups searching for equipment loans, and here are a few of the best:
Currency Capital Equipment Financing
Currency capital matches small businesses with equipment financing from $5,000 to $2,000,000, though as a startup, you’ll likely be looking at the lower end of that range. APR is 6-24%, and a term of 1-5 years. While we’re including them on this list, you do need to already be operating and have annual revenue of $120,000, so it’s a better option for startups that have already been in business for 12 months or so.
|Loan Amount:||$5,000 – $2 million|
|APR Range:||6.00% – 24.00%%|
|Time to Fund:||As early as same day|
|Loan Term:||One to five years|
|How To Qualify:||620+ Personal Credit Score
$120,000+ Annual Revenue
|Great Option For:||Large Equipment Financing
Competitive Interest Rates
|Click “Check Rates” to apply to Currency Capital|
eLease Equipment Financing
eLease Equipment financing has been in the business of equipment financing since 1995 and understands entrepreneurs. They use a simple online application procedure to make your life easier and that 25 years of experience allows them to give you the best lease or loan for your startup.
Balboa Capital Equipment Financing
Balboa Capital Equipment Financing prefers its startups to have been in business for more than 12 months and have a turnover of more than $300,000. So it is not one for those with more modest aspirations. They do offer a very fast decision-making system that will enable you to get the money in your account very quickly.
Always remember that a loan of any sort is an important step, and equipment loans for startup businesses are no different. You must find out exactly what figures are involved and make sure you can keep up the repayments. At PrimeRates, we are specialists in helping you sort out what is available and find the best loans for you and your startup.