Equipment Financing for Business Expansion

Image from Wikimedia Commons, CC BY 3.0

"The right equipment doesn't just improve efficiency—it can transform your entire business model and open doors to new revenue streams."
Daymond John

Before becoming a Shark Tank investor and building FUBU into a $6 billion brand, Daymond John started with just a few sewing machines in his mother's house. He understands that strategic equipment investments can be the catalyst for business growth, and that financing these purchases appropriately is crucial for maintaining healthy cash flow during expansion.

Understanding Equipment Financing

Equipment financing allows businesses to purchase necessary equipment for expansion while spreading the cost over time. Unlike general-purpose loans, equipment financing is specifically designed for acquiring machinery, vehicles, technology, or other business equipment, with the equipment itself typically serving as collateral for the loan.

Best for: Businesses expanding operations that require specific equipment purchases, especially those that need to preserve working capital for other aspects of growth.

Types of Equipment Financing

Equipment Loans

Traditional loans specifically for purchasing equipment, with the equipment serving as collateral.

Financing amount: Typically 80-100% of equipment value
Terms: Usually matched to the expected useful life of the equipment (2-7 years)
Interest rates: 6-16% depending on credit profile and equipment type
Ownership: You own the equipment once the loan is paid off

Equipment Leases

Rental agreements that allow use of equipment without full ownership, often with options to purchase at the end of the lease.

Types: Capital leases (eventual ownership) and operating leases (rental only)
Terms: 2-5 years typically
Costs: Monthly payments often lower than loans, but potentially higher total cost
Ownership: Depends on lease type; may include purchase option at end of term

Sale and Leaseback

For businesses that already own equipment but need to free up capital for other expansion needs.

Process: Sell owned equipment to a financing company, then lease it back
Benefit: Immediate cash infusion while retaining use of equipment
Consideration: Higher long-term cost than keeping owned equipment

Advantages and Challenges of Equipment Financing

Advantages:

Up to 100% financing of equipment cost
Faster approval than conventional loans
Built-in collateral (the equipment)
Potential tax benefits (Section 179 deductions)
Fixed payment schedule for easier budgeting
Preserves working capital and other credit lines
Often easier to qualify for than general-purpose loans

Challenges:

Limited to equipment purchases
May have higher interest rates than conventional loans
Potential for the equipment to become obsolete before loan payoff
Down payment may be required (typically 10-20%)
Some equipment may depreciate quickly
Potential for being locked into outdated technology

Tax Benefits of Equipment Financing

Equipment financing offers several potential tax advantages that can significantly reduce the effective cost:

Section 179 Deduction: Allows businesses to deduct the full purchase price of qualifying equipment in the year it's purchased (up to $1,050,000 for 2021)
Bonus Depreciation: 100% first-year depreciation for qualified new and used equipment
Interest Deductions: Interest paid on equipment loans is typically tax-deductible as a business expense
Lease Payment Deductions: Payments on operating leases are often fully deductible as business expenses

Note: Always consult with a tax professional for advice specific to your business situation.

Qualification Requirements for Equipment Financing

To qualify for equipment financing for business expansion, you'll typically need to meet these requirements:

Time in business: Usually 6+ months (some lenders require 2+ years)
Credit score: 600+ for most lenders (higher scores secure better rates)
Down payment: 0-20% depending on credit profile and equipment type
Equipment purpose: Must be essential to business operations
Equipment value: Must justify the financing amount
Business financials: Demonstrable ability to make payments

Key Takeaways: Equipment Financing

Specifically designed for purchasing business equipment with the equipment serving as collateral
Options include loans (for ownership) and leases (for use with potential ownership)
Typically faster approval and easier qualification than general-purpose loans
Significant tax benefits available through Section 179 deductions and depreciation
Preserves working capital and other credit lines for different aspects of expansion

How to Apply for Equipment Financing

Identify the specific equipment needed for your expansion
Get detailed quotes from equipment vendors
Determine whether to lease or buy based on your business needs and financial situation
Research equipment financing companies including banks, online lenders, and equipment manufacturers
Prepare documentation including business financials, equipment specifications, and vendor quotes
Submit applications to multiple lenders to compare offers
Review terms carefully before signing, paying attention to interest rates, fees, and end-of-term options