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Equipment Loans: What Small Businesses Need to Know

If your farm or small business needs expensive machinery to raise output or to help ease day-to-day operations, you might want to consider an equipment loan. This type of loan can save you time and money if used well.IMG_0228

The basics

An equipment loan can be backed by a combination of money and the equipment itself as security, but at the end of the term, you’ll own the equipment. If you know you’ll be using the gear for a long time and won’t need to upgrade or replace it very often, then this sort of financing might be a good idea. Check with your lender to learn more about available options.

Perks of an equipment loan

  • Immediate use: If you’re just starting out, you need a chance to develop your farm or business without being bogged down by spending a lot of cash up front. An equipment loan lets you preserve funds while giving you time to pay for the machinery instead of immediately.
  • Tax benefit: You can take advantage of the equipment, farm structures or livestock as a Section 179 deduction on your business taxes. Essentially, you can deduct a portion of the related loan payment, since it is for business-related property. Check with your tax consultant for more details.
  • Less documentation: Generally, loans secured by equipment can be processed quicker and can have less documentation than a loan secured by real estate.
  • Faster funding: Typically, you’ll receive financing for equipment more quickly than you would receive money from general-purpose business loans. If you’re caught between using your credit to pay for what you need and getting an equipment loan, the latter can be much more straightforward and might help you save time. If you’re just getting started, time can spell the difference between making it and closing up shop.

Other things to know

  • Rules for loans: Certain guidelines might need to be followed for an equipment loan application to be successful. For a loan guaranteed through the U.S. Small Business Administration, for instance, you’ll need to support at least one goal from the agency’s list, which can include creating a new job, supporting alternative energy, fostering rural development or others. You also might need to provide evidence of stable financial health.
  • Loan terms: A loan with a fixed interest rate will keep monthly payments consistent. With variable rates, you’ll be exposed to fluctuations based on a market index, making it harder to know what to expect for future expenses.
  • Keep your financial information up to date: By keeping your personal and business financial statements and tax returns updated at your financial institution, the decision process can be shortened.

As you consider your loan options, you might find an equipment loan the best way to keep your business running smoothly. Whether the assets involved are in the realm of agriculture or office machinery, it’s good to know what type of financing might help the most and what won’t.

Spencer Tierney, NerdWallet

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