Equipment financing is a loan that your business can use to purchase equipment it needs in order to operate. If you work in a restaurant, this can be a pizza oven. If you work in new construction, this may be a bulldozer or excavator. If you work for a real estate company, this may be a new printer, scanner or fax machine. For any type of business, you may purchase a commercial vehicle. Equipment loans are similar to your typical car loans; you pay them back in regular payments and your payment includes both money towards the principal and money towards an interest rate.
Before you apply for an equipment loan for your business, it is important to understand how they work and what they entail. It is smart to get a loan that is long enough so that you will not be required to make large payments each month to pay it back, but short enough so that you will still be using the equipment once your loan is paid off. For example, if you plan on using a commercial vehicle for five to six years, you do not want its loan to be seven years long.
You should also be prepared to pay a down payment, if necessary. Equipment loans sometimes require high down payments initially. This is not always the case and varies based on different loan companies, but it is wise to check what your down payment requirements might be ahead of time.
Though equipment loans have interest rates, as with most other types of loans, they usually have the lowest interest rates when compared to other loans. This is beneficial, as you are able to direct most of your monthly payments towards the principals, not accrued interest. Additionally, when it is time to pay your taxes, you can deduct the interest you paid towards that loan from what you may owe. You can also earn a depreciation tax benefit, as your equipment likely depreciates in value to some degree over the course of the year.
Once you pay back your equipment loan, you own that equipment outright. You can continue to use it if it is working fine, and it can be a valuable asset for your business. You can also then lease it to others to earn some extra cash if you do not need to use it all the time. Understanding the interest rates, down payment requirements, tax information and more can help you find the best equipment loan for your business.