Equipment Loans
Whether it's for new machinery, quick repairs, or full replacements, an equipment loan could provide the funds your business needs to keep your competitive edge.
This article contains general information and is not intended to provide information that is specific to American Express, or its products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.
Replacing or upgrading necessary equipment could help keep your business running smoothly, so you can stay focused on growth. Paying for machinery or repairs on your own can be challenging, but businesses may be able to cover these costs if they apply and are approved for equipment loans.
What is an equipment loan?
Equipment loans are loans for purchasing business equipment. Whether you're in the construction industry, specialize in manufacturing, or run a busy restaurant, business equipment loans could provide much-needed capital to help you maintain operations.
Some of the ways that you might be able to use equipment financing options include:
- Replacing existing equipment and machinery
- Repairing equipment that's been damaged
- Purchasing new equipment
- Upgrading equipment
Getting a loan for equipment may allow you to preserve your cash, or, if liquid assets are running low, to purchase necessary equipment when you need it.
How does equipment financing work?
Equipment loans are similar to other types of business loans in that you're borrowing a lump sum, which you must repay with interest. The amount a business can borrow might range from 80% to 90% of the equipment's value, with the business paying the difference as a down payment. Equipment business loan rates are often fixed and they have repayment terms lasting up to 10 years, or in some cases, longer.
What makes business equipment loans different from other business loans is that they're a form of asset-based financing. When financing is asset-based, it means that the loan is secured by collateral. Specifically, the collateral in question is the equipment itself. Should you default on an equipment loan, the lender may be able to seize the equipment.
Equipment loan vs. equipment lease
Equipment loans provide a lump sum of money that you can use to purchase equipment. Once you repay the loan in full, you'll own the equipment outright.
An equipment lease, on the other hand, allows you to pay for the use of business equipment over a set term. At the end of the term, you may have the option to renew the lease agreement or purchase the equipment at an agreed-upon price. In that sense, it's similar to leasing a car.
Why would you choose an equipment lease vs. an equipment loan?
Leasing could make sense for your business if the nature of your work requires you to regularly repair or upgrade your equipment. You might also consider leasing if you don't have sufficient assets for a required down payment, or you would like the option to buy the equipment later without being locked in.
Benefits of equipment financing
Getting a loan for equipment could yield some important advantages for your business. Several reasons to consider exploring equipment loans beyond making equipment repairs or replacements include:
- Preserves working capital and cash flow: Depending on the lender, equipment loans may come with low or no down payment requirements, allowing you to use your working capital for other needs.
- Flexible payment options: Many equipment financing loans offer monthly payments and quarterly, bi-annual, and annual repayment terms. You may be able to work with your lender to determine what's best for your business needs.
- Long-term business investment: Purchasing equipment with a loan instead of leasing equipment gives you ownership of it, making equipment loan payments a potential long-term investment in your own business.
As part of your considerations, you might review your business cash flow to determine if it's sufficient to keep up with the required payments for an equipment loan. Remember, equipment loans or other types of financing could make the things you buy for your business more expensive once you take into account interest and fees.
Alternative financing options for equipment
Equipment loans may not be your only borrowing option to purchase necessary equipment for your business. There are a few other possibilities you might consider for meeting your business financing needs:
- Using a business line of credit for equipment: A business line of credit gives you access to a flexible credit line that you can use as needed. Unlike equipment loans, which apply interest to the full amount borrowed, you only pay interest or fees on the portion of the credit line that you actually use.
- Traditional small business loans: Traditional small business loans allow you to borrow for equipment or any other purpose, without requiring large down payments or equipment as collateral. You might choose a traditional small business loan if you have multiple expenses to cover beyond equipment purchases, or you would prefer not to have to put anything down.
- Leveraging SBA loans for equipment: The Small Business Administration (SBA) offers multiple loan options for business owners, including 504 loans, which could be used for purchases of long-term equipment and machinery. You might consider a 504 loan for equipment if you're interested in borrowing larger amounts or need a longer repayment term.
Equipment loans FAQs
Equipment loans could be used to purchase a wide variety of equipment. You might get a business equipment loan to replace broken equipment if it's cheaper than repairing it or if you're interested in upgrading to the latest model.
Examples of potential ways to use equipment loans include:
- Computer hardware and software
- Office furniture and equipment, such as desks, chairs, or copy machines
- Construction equipment, including heavy machinery and tools
- Medical equipment
- Farm equipment, such as generators or tractors
- Point-of-sale systems
- Shelving, racks, and display stands
Generally, the only limitations on what you can buy with equipment loans have to do with your industry.
Equipment loan interest rates may vary by lender, and you may need to get one or more rate quotes to estimate what you might pay. Equipment loans often have fixed interest rates, and some of the factors that could affect your rate include your creditworthiness, the amount you're looking to borrow, the quality of your collateral, and the loan repayment term.
Credit score requirements for equipment loans may vary by lender. It's not uncommon to see lenders require a credit score of 660 or higher for approval.
In addition to credit scores and overall creditworthiness, lenders could consider other factors for equipment loans. These factors may include length of time in business, annual revenue, and the value of the equipment that you're hoping to purchase.
Equipment loan repayment terms depend largely on the lender and the amount of the loan. Loan terms may last up to 10 years, though it's possible to get an even longer term. With SBA 504 loans, for instance, you can take up to 25 years to repay the loan.
In other cases, the lender might set the loan term based on the expected useful life of the equipment. If you're buying a piece of equipment that would be considered obsolete in 15 years, the lender might offer a 15-year repayment term.
Finding the right equipment loan for your business
Financing your next equipment purchase starts with researching and understanding your options. Remember that equipment financing options may vary across lenders, so be sure to choose the equipment lease or loan with the features you care most about. When comparing loans vs. other types of small business financing for equipment, it's helpful to consider loan limits, repayment terms, interest rates, and fees.
American Express offers the American Express® Business Line of Credit1, and you can click here to learn more. Single repayment loans may become available to eligible existing and new Business Line of Credit customers at different times.
Article Footnotes
1 American Express® Business Line of Credit offers access to a commercial line of credit ranging from $2,000 to $250,000; however, you may be eligible for a larger line of credit based on our evaluation of your business. Each draw on the line of credit will result in either a separate installment loan or a single repayment loan. All loans are subject to credit approval and are secured by business assets. Every loan requires a personal guarantee. For single repayment loans, we charge a total loan fee that ranges from 0.95%-1.80% of the amount you borrow for 1-month loans, 1.90%-3.75% for 2-month loans, and 2.85%-6.05% for 3- month loans. Single repayment loans incur a loan fee at origination and the principal and total loan fee are due and payable at loan maturity. There are no required monthly repayments for a single repayment loan. Repaying a single repayment loan early will not reduce the loan fee we charge you. For installment loans, we charge a total loan fee that ranges from 3-9% of the amount you borrow for 6-month loans, 6-18% for 12-month loans, 9-27% for 18-month loans, and 12-18% for 24-month loans. Installment loans incur a portion of the total loan fee for each month you have an outstanding balance. If you repay the total of the principal of an installment loan early, you will not be required to pay loan fees that have not posted for subsequent months. For each loan that you take, you will see the applicable loan fee before you take the loan. Once you take the loan, the loan fees that apply to that loan do not change. We reserve the right to change the loan fees that we offer you for new loans at any time. American Express reserves the right to offer promotions to reduce or waive loan fees from time to time. Not all customers will be eligible for the lowest loan fee. Not all loan term lengths are available to all customers. Eligibility is based on creditworthiness and other factors. Not all industries are eligible for American Express® Business Line of Credit. Pricing and line of credit decisions are based on the overall financial profile of you and your business, including history with American Express and other financial institutions, credit history, and other factors. Lines of credit are subject to periodic review and may change or be suspended, accompanied with or without an account closure. Late fees may be assessed. Loans are issued by American Express National Bank.
Single repayment loans may become available to eligible existing and new Business Line of Credit customers at different times.
The material made available for you on this website is for informational purposes only and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.
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The material made available for you on this website is for informational purposes only and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.
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