Key takeaways
- You can find equipment loans from traditional banks, online lenders and even equipment manufacturers in some cases
- SBA 504 loans are an option if you’re looking to apply for an SBA loan for an equipment purchase
- If you can’t get approved for an equipment loan or need an alternative, you could go for a business line of credit or equipment leasing instead
Many businesses need equipment to perform their work and deliver products to customers. But because businesses don’t always have the cash to drop on new equipment, an equipment loan can help bring in the tools needed. Essentially, an equipment loan is a term loan with a set repayment schedule but uses equipment as collateral.
The good news is that you can find equipment loans from every type of lender, from traditional banks to SBA or online lenders.
Getting an equipment loan from a traditional lender
Getting an equipment loan is a great option to start a relationship with a traditional lender. While known for being strict with which businesses qualify, banks are likely to approve equipment loans if your business is in a financial gray area. That’s because equipment loans are secured by the equipment as collateral.
Traditional lenders may also offer SBA loans, like the 504 loan, which is designed specifically for buying commercial equipment. The SBA limits interest rates and offers long repayment terms of up to 10 years for 504 loans.
Traditional lenders that offer equipment loans
| Lender | Loan amounts | Repayment terms | Key features |
|---|---|---|---|
| Bank of America | From $25,000 | Up to 5 years |
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| U.S. Bank | Up to $1 million | 24 to 60 months |
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| TD Bank | Not disclosed | Not disclosed |
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| Wells Fargo | From $100,000 | 12 to 84 months, depending on equipment type |
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Pros and cons
Most traditional banks offer equipment loans with competitive interest rates, but you need to be an established business to qualify.
Pros
- Low interest rates. Traditional banks tend to keep interest rates lower than online lenders, especially since this is a secured loan.
- In-person support. Traditional lenders have local branches where you can meet with a banker face to face.
- May offer SBA 504 loans. Many traditional banks are SBA-approved or preferred lenders. You can find an approved lender through the SBA’s lender match tool.
Cons
- May not accept bad credit. These lenders typically have strict eligibility guidelines, like a credit score of 670 or higher, so they don’t take on extra risk.
- Typically requires two years in business. Most banks don’t approve businesses with under two years in business, excluding startups from getting funding.
- Potentially long applications. Traditional lenders tend to have multiple-page applications and require a long list of documents. And going in person or sending in paperwork can drag out the process.
Bankrate insight
In fiscal year 2023, according to the SBA 7(a) & 504 Summary Report:
- The SBA has approved $6.4 billion dollars in funding for its SBA 504 loans
- The average loan size for 504 loans was almost $1.1 million
- The states with the highest amount of funding were California, Florida and Texas
- Most of the funding for SBA 504 loans goes to businesses over two years old (79.6%), but close to 14.1% of approved 504 loans were awarded to startups
Online lenders
Online lenders tend to offer similar repayment terms and starting interest rates as traditional lenders, but may specialize in equipment financing and offer loans to startups. They also tend to loosen credit score requirements to 600 or lower in some cases.
Online lenders may quote you a simple interest rate or factor rate, making it harder to compare with other equipment loans. These rates don’t give an accurate picture of interest plus loan fees the same way an APR does.
Online lenders that offer equipment loans
| Lender | Loan amounts | Terms | Key features |
|---|---|---|---|
| Balboa Capital | Up to $500,000 | 24 to 60 months |
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| National Funding | Up to $150,000 | 24 to 60 months |
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| SMB Compass | $25,000 to $5 million | Up to 10 years |
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| Taycor Financial | $10,000 to $1 million | 4 to 60 months |
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| Triton Capital | $10,000 to $500,000 | 12 to 60 months |
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Pros and cons
Online lenders are more welcoming to business owners with bad credit, but they may offer a higher interest rate to offset your credit risk.
Pros
- Welcomes risky borrowers. Some online lenders accept business owners with a credit score of 500 or 550. They’re also more welcoming of startups with less than two years in business.
- Fast applications and funding. Online lenders often streamline their applications and may specialize in equipment loans, providing funds quickly within 24 to 48 hours.
- More likely to offer no down payment. Many fintechs offer 100 percent financing, while banks like borrowers who can make a 10 percent to 20 percent down payment.
Cons
- Potentially higher rates. While starting rates are similar to banks, online equipment loans can quickly rise to a 35 percent APR or more.
- Not likely to offer SBA 504 loans. SBA 504 loans are designed for equipment financing and are backed by the government, but most fintechs aren’t SBA lenders.
Equipment financing companies and manufacturers
In some cases, you may be able to get an equipment loan through an equipment manufacturer or specialized equipment lender. If you finance through a manufacturer, you get the benefit of buying and financing commercial equipment in the same place.
Manufacturers may partner with a lender to offer financing. If so, you may want to compare that lender’s loan features with other equipment loans to make sure you’re getting the best deal.
If you finance through a specialized lender, these are typically direct lenders that offer loans for commercial equipment or a special type of equipment, like a semi truck. These equipment financing companies may offer extra features or loans that meet an industry’s unique needs. They also typically offer fast funding in as little as the same day.
For example, CAG Truck Capital offers semi-truck financing with an engine overhaul loan option, which helps truckers get financing to repair their truck engines. It also claims to work with borrowers from all credit risks.
Pros and cons
Pros
- Fast funding. You might be able to receive funding as soon as the same or the next business day after the loan is approved.
- Often works with bad credit. Manufacturers and direct financing lenders may accept a variety of credit levels, including bad credit.
- May offer industry-specific loans. You can find loans designed for the specific type of equipment that you’re buying, such as a semi-truck loan.
Cons
- Only offers equipment loans. Specialized lenders typically offer only equipment loans. If you need another type of loan, you’ll need to establish a relationship with a different lender or bank.
- No in-person support. Most specialized or manufacturer lenders stick with phone or online support for customer service, not offering in-person locations.
- May not be a recognizable brand. When working with a specialty lender, you may have never heard of the brand, making it harder to trust the lender with this financial relationship.
Equipment loan requirements
According to the 2023 Small Business Credit Survey by the Federal Reserve Banks, auto and equipment loans have a 91 percent approval rate, making it one of the easiest business loans to get.
The typical equipment loan requirements are:
- Time in business: One to two years
- Minimum credit score: 550 to 650
- Annual revenue: $100,000 to $250,000
- Down payment: 10 percent to 20 percent
Alternatives to equipment loans
Not every business qualifies for an equipment loan, and you may need extra flexibility with repayments or the use of funds. Try one of these options for buying equipment for your business:
- Term loan. Like equipment loans, term loans pay out a lump sum and have fixed repayments. But this loan may have longer repayment terms and may not require you to secure it with collateral.
- Business line of credit. A line of credit lets you borrow funds up to a set amount at any time once you’re approved. The credit line also replenishes as you pay down the loan. And you’re not limited to using the money just to buy equipment.
- Equipment leasing. A lease can help you get equipment without as much upfront cost, such as no down payment. It can allow you to get newer equipment than if you were to finance, and it often comes with maintenance included. Some leases give you the chance to buy the equipment at the end of the term.
- SBA 7(a) loan. The SBA 7(a) loan is the most common SBA loan available, and you can use the funds for general purposes like buying equipment. The SBA guarantees up to 85 percent of the loan, compared to just 40 percent for 504 loans.
- Merchant cash advance. A merchant cash advance grants funds based on future sales, such as debit or credit card sales. MCAs tend to accept bad credit businesses and allow you to use the funds for any expense.
Bottom line
As a secured business loan, equipment loans offer low interest rates and loose eligibility requirements no matter where you get the loan. But traditional lenders tend to offer the lowest starting rates for creditworthy businesses.
Online equipment loan lenders are more accepting of startups and owners with bad credit and can provide funds within a few days. Your choice of lender really comes down to which benefits your business is looking for with a lender.
Frequently asked questions
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Many lenders have loose credit score requirements of around 600 for equipment loans, while some drop even lower to the 500s. Lenders can accept higher-risk borrowers because the loan is secured by the equipment.
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Equipment loans often start around 6 percent, which is a good interest rate for creditworthy business owners. But average rates for bad credit can get up to 35 percent or higher.
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Most banks offer business equipment loans with competitive rates, while online or direct lenders may offer equipment loans with no down payment and funding in as little as 24 hours. Repayment terms stay in the same range for these types of lenders.
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