A business loan provides the capital needed to pay for a business’s expenses, including startup, operations, facility renovation and expansion. An owner generally must document the specific purposes of this capital before an application for a business loan will be approved. An equipment loan is a common type of business loan, as many businesses need specialized equipment to operate.
Other types of business loans use a business’s assets or a business owner’s personal assets as collateral, which usually requires a Uniform Commercial Code (UCC) filing. However, an equipment loan uses the equipment itself as collateral, although the terms and conditions that lenders require will depend greatly on the specific type of equipment. Equipment loans include the following types:
- Dental equipment
- Restaurant equipment
- Heavy equipment
- Industrial equipment
Dental Equipment Loans
Dental equipment becomes obsolete more quickly than other types of business equipment due to rapid technological advances in dentistry. The expected lifespan of dental equipment is therefore an important consideration when considering the terms of such a loan. It is particularly important to avoid a loan term that lasts longer than the equipment. Banks are generally the best option for obtaining dental equipment loans, although they also have the most strict credit requirements.
The expected obsolescence of dental equipment means that these loans require a higher credit rating. Lenders may also require the business owner to provide bank statements, business tax returns and personal tax returns. As with other types of equipment loans, you should also prepare a business plan that describes how the equipment will increase the business’s profitability. A proof of profitability for two of the last three years is also a common requirement when applying for dental equipment loans.
Additional requirements for this type of loan include a debt service coverage ratio (DSR) of at least 1.25, which is your net operating income (NOI) divided by your debt services. NOI is the business’s annual income minus the expenses that it generates from its operations. Debt services are the total of the payments the business is making towards the repayment of debt each year, including principal and interest. A DSR greater than 1 means the business has a positive cash flow, while a DSR less than 1 means the business has negative cash flow.
Restaurant Equipment Loans
Equipment replacements and upgrades are relatively common occurrences for restaurants. This equipment is often subject to high physical stresses such as heat and regular use, and a growing restaurant will also need more equipment to expand its operations. Many lending options are available for restaurant equipment loans, but it is essential to know the lifespan of the equipment before purchasing it, which primarily depends on its hours of operation.
Lenders still require a good credit rating for restaurant equipment loans, even though the equipment is the collateral for the loan. Some lenders may require a credit rating of 750 out of a maximum score of 850, especially if the lender is a bank. Lenders will also require a business owner to provide proof of profitability for two out of the last three years in business when applying for this type of loan. As with other equipment loans, the term of the loan should be no longer than the equipment’s expected lifespan.
Heavy Equipment Loans
Heavy equipment is often used in agriculture, construction and farming. The wear rate on this equipment is especially high, and it is also subject to obsolescence due to advancing technology. A large number of lenders and quick turnaround are particularly beneficial for heavy equipment loans, since these loans are often critical to a business’s continued operations. A business may also need real estate financing in conjunction with these loans if the purpose of the equipment is to improve farmland.
Lenders of this type of loan frequently want to ensure that a borrower has experience in the industry, as demonstrated by a history of making a profit. A detailed business plan can also demonstrate your industry expertise to a lender. A good credit score is also very important for this type of equipment loan. Lenders of heavy equipment loans may want to know how the equipment will generate income for the business and if any of the business’s employees have experience in operating that particular type of equipment. The equipment’s licensing requirements are also important information to know before buying heavy equipment, even if the lender does not require it.
Industrial Equipment Loans
Industrial equipment includes equipment that can generate income for a business but does not fall into other categories. It covers commercial vehicles weighing more than 2.5 tons, forklifts, manufacturing machinery, farm tools and machine tools. The rates and terms on industrial equipment loans vary greatly, but the lender will usually finance only about 80 percent of the industrial equipment’s purchase price. This requirement means that the business will typically need to make a down payment of about 20 percent for industrial equipment. Some lenders will include up to 25 percent of the equipment’s soft costs in the loan, which includes shipping, installation, maintenance, and software.
Lenders typically require extensive documentation for industrial equipment loans, including bank statements, business tax returns, personal tax returns and business registration. A DSR of at least 1.25 is also a common requirement for this type of loan. Some lending options allow you to deduct loan payments on industrial equipment as an operating expense, although your CPA will need to provide the details on this possibility.
Find the Right Lender with Magilla Loans
Magilla Loans connects borrowers with lenders for all types of loans, including business equipment loans. Our platform allows borrowers to search and compare loans without providing personal information such as name, phone number and social security number. The loan proposals are then presented on our patented MagChart™, which allows borrowers to easily compare loan terms. Visit Magilla Loans online today to learn more about how we can help you find the right business equipment loan to suit your business needs.