Alternatives to Equipment Loans

Compared to other types of business loans, equipment loan interest rates tend to be lower, making them an excellent option for businesses seeking to repay their loan through set monthly payments.

However, equipment loans might not be the best fit for every business. If you have excellent credit, you might qualify for better rates with a term loan. Additionally, some lenders require a minimum of two years in business or a substantial down payment. Therefore, term loans, lines of credit, and SBA loans are all viable alternatives. Depending on your business needs, leasing equipment rather than financing it could also be a consideration.

Here’s a closer look at common alternatives to equipment financing.

Alternative equipment financing options

Term loan

Term loans are one of the most common and flexible alternatives to equipment loans. Available from various lenders, they can be used for a wide range of business-related expenses, including equipment purchases like restaurant or office equipment and semi-trucks. You can borrow from a bank, credit union, or online lender, and the lump sum can be used to purchase the necessary equipment.

Term loans may be your go-to alternative if you don’t have a down payment, which many equipment loans require. However, be aware of the fees lenders charge in addition to interest. Since term loans can be unsecured, your interest rates may be higher.

Equipment line of credit

Like other business lines of credit and business credit cards, an equipment line of credit provides a set credit limit that you can draw from as needed. You only pay interest on the amount you use, and your limit is replenished as you repay the line. Because it is secured by collateral, you may qualify for a lower interest rate than you would on an unsecured line.

However, your funding will be restricted to equipment purchases. You can’t use an equipment line of credit for other day-to-day business expenses, making it significantly less flexible than an unsecured line of credit. If you need to buy equipment and cover other expenses, consider an unsecured business line of credit instead.

SBA loans

If you have exhausted other forms of financing, the Small Business Administration (SBA) offers a range of government-backed small business loans suitable for equipment purchases:

• 7(a) loans: The standard option, a 7(a) loan, is a term loan that can be used to cover various business-related expenses, including equipment.
• 504 loans: A 504 loan is closely aligned with equipment loans. They are intended for major expenses that help grow your business, such as equipment.
• Microloans: The SBA Microloan program is designed for businesses needing smaller funding amounts. The maximum microloan amount is $50,000, making it ideal for inexpensive equipment and small purchases.

SBA loans generally offer competitive rates but may take longer to apply for and receive funding compared to other alternatives.

Equipment leasing

Equipment leasing allows you to rent equipment instead of purchasing it outright, which means lower upfront costs and reduced monthly payments. This can lower your risk of default.

There are two main types of equipment leases: operating leases and capital leases.

• Operating leases: With an operating lease, ownership of the equipment does not transfer to your business. You use the equipment for the lease term and return it at the end. This short-term option results in lower payments and can provide access to expensive equipment that might otherwise be unaffordable.
• Capital leases: A capital lease gives your business the option to purchase the equipment at the end of the lease term. Unlike an operating lease, you can claim both depreciation and interest as tax credits. For tax purposes, you are considered the owner of the asset throughout the lease duration.

Business credit cards

Business credit cards function similarly to personal credit cards. Your company is given a set credit limit and can charge purchases as needed, paying interest only on the current balance.

While business credit cards may have higher and variable interest rates compared to traditional business loans, they often come with perks. These can include cashback, travel rewards, or a 0 percent APR introductory offer.

Crowdfunding

Crowdfunding allows businesses to raise money through platforms like Kickstarter. There are different types of crowdfunding, including donation-based, reward-based, and equity-based. With donation-based crowdfunding, you don’t have to repay the funds, making it an attractive alternative to equipment financing. However, these platforms typically require you to meet your campaign goal within a specific timeframe to receive the funds. Crowdfunding is ideal for businesses that don’t need immediate financing and are comfortable with the risk of not meeting their funding goals.

Angel investors

Angel investors are private individuals who invest in startups and small businesses, often taking on higher risks. In return for their investment, they typically request equity in the company. If your business fails, they stand to lose their entire investment. However, if your business succeeds, they retain part ownership according to the terms of the agreement. While angel investors can provide favorable terms and valuable opportunities, it’s essential to carefully consider how much equity you are willing to give up.

Where to find alternatives to equipment loans

Since most business loans can be used to finance equipment, you have a variety of options from banks, credit unions, and fintech lenders.

Banks and credit unions

Banks are the traditional source for business loans, but qualifying for one can be challenging, particularly for startups or businesses with limited revenue. Despite this, banks typically offer the most competitive rates and often collaborate with the SBA to provide loans to small businesses. You can generally find term loans and affordable lines of credit at both major national banks and local institutions.

If you already bank with a credit union, you might be eligible for their loan options. Credit unions often offer competitive rates as well. Being member-owned, they may have more flexible qualification criteria, making it easier to secure an equipment loan compared to a traditional bank loan.

Fintech lenders

Fintech lenders operate entirely online and provide rapid loan options, including for businesses with bad credit. They offer robust alternatives to traditional equipment loans, such as term loans, lines of credit, and other financing solutions. Typically, the entire process—from application to funding—happens online and is completed within a few days.

In Conclusion

Your business doesn’t have to depend solely on an equipment loan for purchasing new equipment. There are several financing options available, including business loans designed for startups, that can help cover these costs.

The application process can be lengthy depending on the lender, so be prepared to clearly outline your needs and explain why the equipment is essential for your business. Regardless of the option you choose, it’s important to compare the best small business loans available and obtain quotes from multiple lenders to ensure you find the most suitable financing solution.