Using an Equipment Loan to Grow Your Business

An equipment loan is made by a lender to a business for the purpose of purchasing equipment necessary for a business to grow and prosper. Equipment loans fall under the same requirements for lending as other loan types with the only difference being their special purpose or use. An equipment loan is usually a recourse loan that attaches itself to the equipment being purchased as collateral for the loan.

Businesses that Use Equipment Loans

Different types of business that rely on certain capital equipment such as manufacturers, transportation and utility companies use equipment loans as a regular part of the business financing. An equipment loan meets the funding needs of the business and eliminates the necessity to borrow from current capital or cash flow in order to make a large equipment purchase.

Loan Amortization

An equipment loan is structured in a way to amortize or spread out the cost of the equipment over time. This is important because as the loan is paid off, the value of the equipment depreciations in value. At some point through constant use and wear and tear, the equipment will need to be replaced. By using an equipment loan to spread the cost of equipment over a period of 10, 20 or 30 years, the business is permitted to write down the depreciation as a business expense and effectively lower the interest cost and other loan expenses.

Loan versus Outright Purchase

A business with the necessary capital to make an equipment purchase outright may not find it advisable to do so. This is because the cost of equipment does depreciate, especially equipment that will be in constant use from the time it is purchased until its retirement date. This includes automobiles, trucks, heavy machinery and other types of business equipment. Buying the equipment depletes the business current cash flow and spreads recovery over time. Using an equipment loan allows the business to take a depreciation deduction and deduct the interest on the loan. This should translate into more money for the business in order to help it grow.

A business considering an equipment loan should evaluate the cost of the equipment being purchased and the amount of time needed to recover those costs, based on a published depreciation schedule. The financial officers of the business in connection with the lender typically perform this analysis in order to come up with reasonable loan rates and terms that meet both of their needs.