Equipment loans: How they work and where you can get one for your business

What is equipment financing?

Equipment financing provides the funds you need to purchase essential, specialized equipment for your business. Whether you’re looking to purchase a forklift to move goods in your warehouse or new X-ray machines for your dental practice, an equipment loan can provide the funds you need.

The main advantage of equipment financing is that you can spread out the purchase cost of expensive items into smaller monthly payments. This reduces the impact on your day-to-day cash flow, while at the same time giving you the equipment your business needs to stay competitive, improve performance and grow.

In other words, you get all the benefits of ownership before you actually own the equipment.

How do equipment loans work?

An equipment loan works a lot like a car loan. The equipment you want to purchase is used as collateral for the loan. You can use the equipment while you pay back what you borrowed in monthly installments.

The size of the loan is determined by the asset you buy, and most lenders will let you finance 80% to 100% of the equipment’s value. Once you pay off the loan, you own the equipment.

Because the equipment is used as collateral for the loan, there’s reduced risk for the lender. This means that you can access a lower interest rate than with an unsecured loan, and it’s also easier to get funding even if your business is relatively new.

Equipment financing can be used to purchase a wide range of items, such as:

• Farm machinery
• Computers and IT equipment
• Gym equipment
• Medical equipment
• Construction machinery
• Office furniture
• Restaurant kitchen equipment

Where can I get equipment financing?

You have several options to consider when searching for an equipment loan.

Banks and credit unions

There are a couple options to consider if you’re applying for a loan through a bank or credit union. The first is a term loan offered under the Canada Small Business Financing Program (CSBFP). This federal government program offers loans of up to $1 million for businesses with gross annual revenue of less than $10 million. Up to $500,000 of the loan amount can be used to purchase or improve new or used equipment. Find out more in our CSBFP guide.

The second option is a bank or credit union equipment loan that isn’t backed by the government as part of the CSBFP. You’ll generally find competitive rates, and the application process can be quite straightforward if you already have a business banking relationship with the same provider. But depending on the bank, you may need to book an appointment and visit a branch to apply for a loan.

Online lenders

Online business lenders offer a convenient and completely online application process. They also generally have more lenient eligibility criteria than traditional lenders. However, they may offer higher rates than banks and dealership financing.

Specialist equipment financing companies

Some lenders specialize in offering equipment loans to businesses in specific industries, such as construction, agriculture and healthcare. These companies can provide competitive rates, and you also get the benefit of dealing with a provider that has specialized knowledge about the equipment needs of businesses in your industry.

Manufacturer or dealer financing

Some equipment manufacturers and dealers offer access to financing at the point of sale. These are often provided by third-party lenders, and you may be able to take advantage of special promo interest rates to lock in a competitive deal if you have excellent credit. Just be sure to compare offers from a range of other lenders as well to make sure you’re getting a good value.

Can I get equipment financing for bad credit?

If your business has bad credit or limited credit, it may still be possible to qualify for an equipment loan. This is because equipment loans are secured. With the purchased equipment used as collateral, there’s less risk for the lender if you can’t keep up with repayments.

As a result, a poor credit rating is less likely to stop your loan application from being approved. That said, you’ll still need to be able to present a strong financial case to the lender, so earning high revenue will boost your chance of approval.

Rather than traditional lenders, you may need to consider applying for equipment financing from an online lender or provider that specializes in startup loans. You should also be aware that loans for bad credit tend to come with high interest rates, and the lender may request a large down payment.

How to compare equipment loans

Here are the factors to keep in mind when comparing equipment financing options:

• Interest rates. Shop around to find competitive equipment financing interest rates. If a lender offers pre-approval that doesn’t impact your credit score, get pre-approved to receive a more accurate estimate of how much your loan will cost. Learn more about business loan rates.
• Fees. Read the fine print closely for details of any fees that may apply to your loan. These could include origination fees, late payment fees and NSF charges.
• Loan amounts. Check how much of the equipment purchase price the lender is willing to fund. Is 100% financing available, or will you need to meet a minimum down payment requirement?
• Loan terms. Check how long you will have to pay back what you borrow. A longer loan term means a more manageable monthly payment, which helps with cash flow, but it also means you’ll pay more interest over the life of your loan.
• Eligibility criteria. Check if you meet the lender’s minimum credit score, time-in-business and monthly revenue requirements.
• Turnaround time. How long will it take for your loan application to be approved and funded? Learn more about emergency business loans.
• Repayment options. Can you tailor the repayment schedule to suit your business’s cash flow? Also check if you’ll be hit with a prepayment penalty if you pay back the loan early.

Pros and cons of equipment financing

Pros

• You can use the equipment straight away. Equipment financing lets you purchase the essential equipment you need to grow your business without having to pay the full sticker price upfront. This makes it easier to maintain your cash flow while improving your business.
• Competitive rates. Because equipment loans are secured by the asset you purchase, they offer lower rates than unsecured loans.
• Widely available. Equipment loans are available from a wide range of traditional and online lenders.
• Tax deductions. The interest you pay on equipment loans is often tax-deductible, providing a further financial boost for your business.
• Build credit. Making on-time repayments towards an equipment loan can help improve your business credit score.

Cons

• Down payment requirements. Depending on the lender and your business’s finances, you may need to make a minimum down payment to qualify for a loan.
• Equipment could fall in value. If the equipment you buy depreciates in value faster than expected, you may end up owing more than it is worth.
• Leasing may be more suitable. In some situations, like when your business needs equipment that will depreciate rapidly or frequently need to be replaced, equipment leasing may be a better option.

How to apply for equipment loans

You can apply for equipment financing in Canada by completing the following steps:

1. Work out your needs. Shop around to find the best price for the equipment your business needs. This will help you calculate how much you need to borrow.
2. Compare lenders. Compare lenders that offer equipment financing for businesses in your industry. Check eligibility requirements to find out if your business meets credit score, revenue and time-in-business criteria.
3. Gather your documents. Prepare all the paperwork you need to give the lender. This may include your business registration documents, bank statements, tax returns, business plan and financial projections. You’ll also need to provide details on the equipment you want to purchase.
4. Submit an application. Provide your personal information, contact details and business information. You might also need to undergo a personal and business credit check.

Bottom line

Equipment financing provides the funds you need to buy the essential items your business needs. Make sure you compare equipment loans from a range of providers before choosing the best financing option for your business.

Frequently asked questions

• Is equipment financing the same as leasing?

  No. Equipment financing is when your business takes out a loan to purchase equipment. The equipment you buy is used as collateral for the loan, and you pay it off in monthly installments.

  With a lease, the lender purchases the equipment and then leases it to your business. There's usually no down payment required, and you make monthly payments for an agreed upon period. When the term ends, you can return the equipment, start a new lease or potentially buy the equipment.

• Can I get equipment financing for startups?

  Yes, it's possible to get equipment financing for startups. Because the equipment you purchase is used as collateral for the loan, lenders are more likely to approve loans for businesses with limited credit history. Learn more about startup loans.

To make sure you get accurate and helpful information, this guide has been edited by Leanne Escobal as part of our fact-checking process.

Written by

Tim Falk

Writer

Tim Falk is a freelance writer for Finder. Over the course of his 15-year writing career, he has reported on a wide range of personal finance topics. Whether you're investing in stocks and ETFs, comparing savings accounts or choosing a credit card, Tim wants to make it easier for you to understand. When he’s not staring at his computer, you can usually find him exploring the great outdoors. See full bio