Equipment Loans or Startup Business Loans: Which for acquiring equipment?

The following article is designed for startup business owners seeking funds for equipment. Businesses that have been in operation for two years or less are considered startup businesses. This is because unsuccessful businesses typically fail within the first two years. There are many ways to acquire funds for your business equipment, but this article deals with the two most often used methods: equipment loans and startup business loans.

Business would not thrive without equipment. Regardless of the industry, physical things are an absolute requirement. Even a $1.00 hug booth needs a table, right? If you own your business and you’re just starting out, it’s likely you already know equipment bills gather fast. Luckily, more than one option exists for acquiring the funds. The two most common methods new business owners use to acquire equipment are equipment loans and startup business loans. Each has its advantages and each has its disadvantages.

Ultimately, the choice of how to finance equipment is personal. Many factors play into choosing which option is best for you. Right off the bat, be aware that equipment loans are specifically for equipment and cannot be used to fund anything else. Startup business loans are general loans, and can be used for both equipment and other things. This is the major difference between the two. Still, we will break down each type of loan in regards to purchasing equipment, and then illustrate the pros and cons to help determine which is best for you.

EQUIPMENT LOANS – What are they?

Equipment loans are loans used to purchase business equipment, and they are secured by the equipment itself. This means that if the borrower fails to repay the lender, the equipment is simply taken back. The equipment acts as its own collateral. This is perhaps the greatest advantage of using an equipment loan. Also, because the loan is for the amount of the equipment only, no other collateral must be put up. This significantly lowers the amount of risk associated with the loan.

Because equipment loans are backed by the equipment itself, lenders are generally unconcerned with your business’ standing or credit score. Say your business is not doing so well at the time, but a few certain pieces of equipment could save it. An equipment loan is ideal here, because the lender isn’t worried about your business. They are only worried about being paid. It’s not an investment in your business to the lender; it’s basically a marked up sale.

What can equipment loans cover?

Remember, equipment loans cannot be used to pay off other debts, or to finance anything other than equipment. However, the range of equipment they can cover is extensive. While many lenders have minimum amounts they will lend, something as small as a coffee maker could be purchased. No rules are set in stone when it comes to what equipment the loans can be used for. However, the type of equipment being bought, as well as the condition, can affect the amount borrowed.

That being said, any equipment necessary for the business can be purchased through the equipment loan. Also, most equipment loans cover 80-100% of the total cost.

What are the advantages?

We have already discussed how there is no collateral necessary for equipment loans, since the equipment is sufficient. This is the major advantage, but not the only one. Another major advantage is that after the equipment loan is paid off, you own the equipment! This may seem obvious, but in the case of equipment leasing, you do not own the equipment in the end.

Also, equipment loans typically require much less documentation than other types of business loan. You will not need a business plan, nor any credit printouts or financial history. While good credit naturally helps, equipment loans require very little paperwork. It’s just you, the lender, and the equipment.

Another advantage to taking out an equipment loan is that you’ll have access to the latest technology. This is good no matter what, but especially good if you are replacing broken or outdated equipment. The costs of repairing or upgrading are turned into the costs of (eventually) owning. Equipment loans allow you to have the most up-to-date equipment, and many lenders even offer trade-in options. This means that if part of the way through repayment a better version of the equipment comes out, you can switch to paying for that.

Two more advantages of equipment loans are the prompt response you’ll receive, and the increasing of your net worth. Equipment loan lenders are generally very fast to tell you whether or not you’ve been approved. This is advantageous, because if and when you need equipment, usually time is of the essence. Also, as a nice last advantage, the acquiring of equipment means your business has a new asset. This in turn increases your net worth without a large payment.

What are the disadvantages?

The major disadvantage of equipment loans is that the money can only be used on equipment. Plenty of other costs pop up when running a business and equipment is only one of them. If you find that all other areas are covered, and that you solely need equipment, then this is irrelevant. However, if you’re looking to purchase or upgrade equipment as well as knock some other expenses out, an equipment loan is not for you.

Another disadvantage of equipment loans is that you may end up not needing or wanting the equipment eventually. Since almost all pieces of equipment depreciate over time, selling the equipment back after use likely will not yield a profit. Be sure what you’re buying is an absolute must before you accept an equipment loan.

The last and perhaps most overlooked disadvantage of an equipment loan regards the possible default. If the borrower fails to repay, the lender takes back the equipment. However, if the equipment’s value has gone down since obtaining it, the borrower may owe the lender the difference. For example, you take out an equipment loan for a $1,000 washing machine. Three months later, the washing machine is only worth $700 and you have defaulted on the loan. The lender would take the washing machine and the $300 owed from the depreciation.

All in all, equipment loans are excellent for startup businesses. They make it possible to acquire expensive equipment right away. This provides a means to better production, which means more profit. Although they can only be used for equipment and have some risks in failing to repay them, equipment loans may be the best way for your business to go.

STARTUP BUSINESS LOANS (for equipment)

Another popular way for new business owners to acquire funds for equipment is through a startup business loan. The major difference here is that startup business loans may be used to fund anything business-related. Because of this major advantage, startup business loans may be a better option than equipment loans for some.

‘Startup capital’ is the official business terminology referring to money needed to start a new business. Sometimes called ‘seed money’ as well, it can come in the form of a loan, an investment, or a capitalist. Regardless of the source, startup business loans may be used for equipment.

Personal Loan

With a good credit score and history, a personal loan can be ideal for equipment purchase, especially if paid back quickly. The major perk of a personal loan is that the money usually comes quickly. Also it can build credit. The downsides of a personal loan include relatively high APR, the presence of fees, and the possibility of it not being enough for everything.

Using a personal loan to fund equipment is most recommended if you meet one or more of the following criteria:

  • You have not opened yet for business (Since you have no track record)
  • You only need a small amount (Business loans are generally $5,000+)
  • You lack proper collateral for a business loan

Home Equity Loan

For homeowners only, provided you have at least 20% of the house paid off, a home equity loan can be taken out. Up to 90% of the equity can be borrowed, and the APR is usually very low, since you’re essentially borrowing against yourself. The pros here are the very low interest rates, the net of the loan (depending on the worth of the home), and the fact you can apply for this at your local bank. The major con here is that if unpaid or not paid on time, you could lose your home.

Microloans

Perhaps the single most popular method of funding a startup is the microloan. These are smaller-sized loans offered by lenders with high forgiveness. If your finances are a bit shaky, consider a microloan. On the side of small businesses, microlenders traditionally help those who may not qualify for other larger loans. The pros here are the consistently fair loan terms, the relatively low APR, and the fact that your previous credit is not as much of a factor. The cons here are the lengthy application process (up to 6 weeks) and that the loans are indeed micro, and may not be sufficient.

Venture Capitalists & Angel Investors

A venture capitalist is an investor or team of investors who fund startup businesses wishing to expand but unable to access the stock market. Venture capitalists invest in the business itself and its projected profit. Bear in mind that venture capital is not easy to come across and is extremely competitive.

Angel investors are the polar opposites of venture capitalists. Angel investors are usually either local to the startup business or familiar already with the entrepreneur him or herself. Also, angel investors are investing in the entrepreneur, not necessarily the profit of the startup. Also known as private investors, an angel investor can be a friend, a family member, a former partner, etc.

CONCLUSION

Regardless of how you fund your equipment, it’s a tremendous addition to your assets and an excellent way to build credit. Whichever path to equipment one takes depends on many variables. Use the information above to determine the best path for your business. Remember that within each category of loan, there are many other more-detailed options.

 

 

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