The ins and outs of loans for equipment purchases

Jessica SarterSmall Business Lending

As a small business owner, you might find yourself in a position where you need to purchase new equipment for your company but don't have the funds on hand to do so. Fortunately, most of the major varieties of small business loans, including conventional bank loans and those backed by the Small Business Administration (SBA), make for sound financing options in this situation.

Don't lease – loans will serve you better in the long run
If you're particularly strapped for cash, taking out equipment leases might, on the surface, seem like a more favorable option than purchasing the equipment with funds gleaned from a business loan.

However, a lease can be quite constricting if its term ends up lasting longer than your equipment does. Considering the pace of today's technological development, that circumstance is a lot more plausible than you might think. Owning equipment through financing allows you a greater degree of freedom, and it can be financially beneficial in the long run.

Using SBA loans for equipment financing
Proceeds from all three of the major SBA-backed loan programs – 7(a), CDC/504 and Microloan – are eligible to be used for purchasing equipment. Out of these choices, the 7(a) is often thought of as the most versatile program in a general sense, and it's certainly the most common.

CDC/504 loans and Microloans might not be as ideal as the 7(a), if only because the former's proceeds are generally restricted to long-term purchases (which might not be what you need), and loans from the latter are capped at $50,000. If either of those stipulations mean those programs don't work for you, you'll have to either try the 7(a) or look at non-SBA loans.

Conventional bank loans for equipment financing
If, for whatever reason, the SBA's loan programs don't work for your equipment purchasing needs, you can try to get a conventional small business loan through a bank, credit union or other major financial institution.

Your success in such an endeavor will largely depend on your credit standing and the level of your existing debt. Simply put, the former should be fairly high – 700 to 750 is a perfectly respectable range, though it varies from lender to lender – while the latter should be low.

Also, you might have to hand over some capital of your own as a down payment, not to mention to cover any fees or closing costs the bank may require. Generally, the larger the loan, the more you'll have to put down, and interest will likely be higher since the bank is assuming more risk than it would with a smaller loan.