The first few months of the business could be important to its longterm success. When you’re managing a startup business, you’re a mystery quantity; your subscriber base hasn’t solidified, and lots of lenders might be reluctant to take a risk you.
Still, you’ll need to find methods for getting the gear you need to help make your business successful. If you’re not independently wealthy, that means getting financing. Below, I’ll walk you through a few of the ways you can use loans and leases to invest in your equipment and obtain your startup off the floor.
First: Exactly what is a Startup?
The word “startup” is often fetishized in the industry world, conjuring images of sweatshirt-wearing innovators living in pods in the San francisco bay area, and eventually pushing out some type of software program.
The truth, however, is you don’t have to be a Stanford whiz kid with shadowy private investors to have a startup. You just need to be running a new business–typically between zero-to-two years of age, sometimes three–that’s trying to capitalize on perceived market demand. Startups are usually at a stage of development where their revenue is uncertain and could not be able to sustain the company long-term with no larger clientele or a cash infusion from those venture capitalists we’re always hearing about.
Because they’re in a stage where their finances aren’t stable, startup owners usually have a hard time accessing other kinds of lending. Equipment financing, however, has some properties which will make it accessible even going to startups.
How Equipment Financing Works
Equipment financing, as you may have guessed in the name, covers lending options made to help the borrower (or lessee) acquire physical assets for your company. This can include everything from vehicles to ovens, computers, heavy machinery, etc.
Why is there specialized financing for these types of expenses, and why must startups care?
Well, because you’re dealing with a physical asset which has resale value, your lender can place a lien on the equipment you buy, allowing it to serve as collateral for the loan. If you default, the lender can repossess the product and resell it. This mitigates some of the risk lenders undertake when they’re dealing with entities that don’t possess a long, stable history.
Essentially, all equipment loans are secured personal loans. Leases have their own logic, which I’ll touch on in the next section, but they also benefit from using a transferable product.
Equipment Loans VS Equipment Leases
One of the more confusing facets of equipment financing is it encompasses two completely different types of financing which are, nevertheless, discussed interchangeably. They are equipment loans and equipment leases.
Let’s begin with the greater familiar: equipment loans are quick installment loans used exclusively to acquire hard assets. They use the asset as collateral for that loan, often leading to better terms than you’d see for, say, a similar capital loan. Payments, made monthly, are usually disseminate on the pretty long window (three to seven years). Generally, you’ll be expected to create a down payment around the equipment in the neighborhood of 15%. Equipment loans usually have better rates than comparable leases.
Equipment leases really are a universe unto themselves. While they were traditionally used for renting equipment, but still are, leases encompass far more than simple rental agreements.
Depending on the lease agreement either you or the financing entity (called a lessor) own the title for the equipment for the duration of the lease. This has fairly profound tax ramifications, so make sure you talk to an accountant if you’re trying to increase your value here.
Like loans, leases spread the cost of your equipment plus interest during the period of the word length. Unlike loans, a few of the cost is leftover after the term length, an amount known as a residual. This amount may be as little $1, or up to the fair market price from the product. Just how much it is depends on the type of lease you got.
Capital leases, which are designed to replace loans, typically end with a small residual and also you assuming full ownership from the equipment.
Operating leases, often shorter in duration, will leave a bigger residual, but you’ll have the option to return the gear as well as buy it.
Leases also typically finance the entire price of your equipment, minus the first and sometimes last month’s payment, that make them a more sensible choice should you don’t possess a large sum of cash scattered about.
5 Reasons Equipment Loans & Leases Are Good Options For Startups
So you've now learned that equipment financing reaches least an option for financing your startup business costs. Here are a few pros to presenting equipment loans and leases like a startup:
1. They’re Simple to Qualify For
I touched on this above, but equipment loans and leases carry less risk to financers than unsecured loans and don’t require you to develop an exotic supply of collateral like the majority of other types of secured loans. It makes sense lending options which are more accessible to startups.
2. No Collateral Requirements
It’s not every day you can aquire a secured loan without actually having to put up all of your own collateral, but equipment financing allows you to do just that. With equipment financing, the gear you’re acquiring is the collateral.
3. Equipment Vendors Wish to Give You Financing
Companies that sell big-ticket items know many are expensive and hard to buy with petty cash. Due to this, many provide captive lessors. Essentially, they’ll lend you cash to buy their product. Weird, right?
4. Bigger Deposit Can Circumvent Qualifications
Equipment loans and leases are generally simpler to qualify for to begin with, however, you possess some additional leverage that you simply don’t have with many other types of financing: if you can manage a bigger deposit (or purchase one more month when it comes to a lease), the financer may waive a few of their qualifications.
5. You are able to Rent Equipment That Depreciates Quickly
Some types of equipment (think computers) cash shorter effective lifespans than the others. Operating leases allow businesses to use and then return equipment that won't make a good long-term investment.
5 Reasons A Startup Should Avoid Equipment Loans & Leases
Equipment loans and leases have advantages, but are they advisable for your business? Let’s explore a few of the downsides:
1. They may be Expensive
Anything involving accumulated interest could possibly be considered a trap for that unprepared, and equipment financing isn't any different. Leases, in particular, can transport punishing interest rates that get hidden within their complicated terms. Calculate how much you’ll ultimately be paying above the equipment’s ticket price and choose when the investment is worth it.
2. If You Default, You Can Lose An important Piece Of Equipment
The disadvantage to having the equipment you purchase function as collateral is that it’ll be the first thing your financer comes for if you default in your payments. If that equipment is vital for your operations, you might have an issue.
3. Equipment Vendors Wish to Provide you with Financing
Recognize this one? This can be a pro, for sure. But because convenient like a captive lessor can be, it's also wise to be prepared for extremely high-pressure sales tactics from their store. They lose very little by bullying you right into a lease you’re not ready for.
4. Your Startup May Not Have That Much Cash
If you had large chunks of money to throw at equipment, would you be looking for financing to begin with? While we’re referring to the difference, say, between 15% and 25%, that may be a lot for a company without steady revenue.
5. You Need To Know What You’re Doing
Leasing and returning equipment could make fiscal sense, especially when you element in tax optimization, but this isn’t a game for beginners. You’ll need to be very familiar with the type of equipment you’re buying, tax codes, and prevailing market values to get the most out of shorter-term leasing.
What You have to Be eligible for a Equipment Financing
If you believe equipment financing may be the right choice for your startup, you’ll want to be prepared when it comes time to complete your application. First, you’ll want to know what your credit rating is. Credit ratings aren’t always a do or die for equipment financing, but you’ll have a easier time with higher credit than you'll with poor. You’ll should also have the standard information financers expect for loan applications. Included in this are things like:
- Legal documents and licenses
- Bank statements
- Tax returns
- Statement of owner’s equity
- Business history
- Income sheet
You’ll also need to provide details about the merchandise you’re buying and who you’re buying it from. Having that information on hand will greatly accelerate the applying process.
The good news is that equipment financing is among the faster types of financing you will get, with time to funding usually measured in days instead of months.
Equipment Financing FAQs
How does equipment leasing and loans work?
Equipment leasing is really a process that you rent a piece of equipment from a renter, called the lessor. During the lease, the equipment is technically owned by the lessor.
By contrast, an equipment loan can be used to purchase a piece of equipment. In an equipment loan agreement, you own the gear.
How can you get equipment financing?
The process of getting equipment financing will be different depending on the equipment you'll need, whether you want a lease or loan, as well as your strength as a borrower.
Typically, you begin the entire process of getting equipment financing by choosing the equipment you need for the business, deciding what type of financing is better, after which seeking out appropriate financers.
Is it better to lease or buy business equipment?
Whether leasing or buying is better is determined by the type of business equipment you'll need and the financing options you have available. In most cases, its easier to buy once the equipment can last a long time, and to lease when you're only using the equipment for any small amount of time or it frequently needs to be replaced with a more recent model.
How big is the equipment leasing industry?
Experts are convinced that the gear leasing industry in the usa makes over $100 billion in revenue annually. For example, the Rental & Leasing Industry Report released by Statista estimated that the revenue of the profession was $167.1 billion in 2022.
How are equipment lease payments calculated?
Your equipment lease payments will vary depending on metrics like:
- The type of lease
- The price of the equipment
- The length of the lease
- The perceived risk of lending to you
Many equipment financers offer calculators on their website so you can see how payments change whenever you input different metrics.
Next Steps
Does equipment financing sound right for your startup? Wondering what to do came from here? We’ve got a lot more resources available for you!
Check Out The most popular Equipment Financers For Small Businesses
If you’re prepared to look for a lender or lessor to invest in some equipment for you, you’ll want to check out our list of favorite equipment financers.
Don’t Think An Equipment Loan Or Lease Is Right For You? Take A Look At Other Financing Options For Startups
Did we talk you out of trouble of seeking an equipment loan or lease, but you still need financing? Check out our other financing options for startups.
