Equipment is essential for many small businesses, whether it is for manufacturing, construction, transportation, or other purposes. However, buying equipment can be a costly and challenging endeavor, especially for startups and new ventures. Fortunately, there are financing options available for small-business owners who want to purchase equipment, such as loans guaranteed by the U.S. Small Business Administration (SBA).
What is an SBA equipment loan?
An SBA equipment loan is not a direct loan from the SBA, but rather a loan from an approved lender that is partially guaranteed by the SBA. This means that the SBA agrees to repay a portion of the loan in case the borrower defaults, reducing the risk and encouraging the lender to extend credit to small businesses. The SBA sets the guidelines and eligibility criteria for the loans, but the lender determines the interest rate, fees, and terms.
SBA equipment loans can be used to purchase or lease new or used equipment, such as machinery, vehicles, furniture, computers, or tools. The equipment itself serves as collateral for the loan, which means that the borrower does not need to provide any other assets or personal guarantees. The loan amount, interest rate, and repayment term depend on the type of equipment, the borrower’s creditworthiness, and the lender’s policies.
Types of SBA loans for buying equipment
There are different types of SBA loans that can be used for buying equipment, depending on the borrower’s needs and preferences. Here are some of the most common ones:
- SBA 7 (a) loan: This is the most popular and versatile SBA loan program, with a maximum loan amount of $5 million. It can be used for a variety of purposes, including equipment purchases, working capital, real estate, and business acquisition. The interest rate for an SBA 7 (a) loan ranges from 11.5% to 15%, and the repayment term is typically 10 years or less when used for equipment. The SBA guarantees up to 85% of the loan amount for loans of $150,000 or less, and up to 75% for loans above $150,000.
- SBA CDC/504 loan: This is a long-term, fixed-rate loan program that is designed for major fixed asset purchases, such as equipment, real estate, and construction. The maximum loan amount is $5.5 million, and the interest rate is based on the current market rate for 5-year and 10-year U.S. Treasury issues. The repayment term is 10 years for equipment and 20 years for real estate. The SBA guarantees 40% of the loan amount, while a certified development company (CDC) provides another 40%, and the borrower contributes the remaining 10%.
- SBA microloan: This is a small loan program that provides up to $50,000 for startups and existing small businesses. It can be used for equipment, working capital, inventory, supplies, or other business expenses. The interest rate for an SBA microloan varies from 8% to 13%, and the repayment term is up to 6 years. The SBA does not guarantee the microloan, but rather provides funds to intermediary lenders, such as nonprofit organizations, who then lend to small businesses
Benefits of SBA equipment loans
SBA equipment loans offer several benefits for small-business owners who want to purchase equipment, such as:
- Competitive terms: SBA equipment loans generally have lower interest rates and longer repayment periods than other equipment financing options, such as equipment leases, merchant cash advances, or credit cards. This can help reduce the monthly payments and the total cost of borrowing.
- Flexible requirements: SBA equipment loans are easier to qualify for than conventional bank loans, as they have less stringent credit and collateral requirements. The SBA also considers the potential of the business, not just its financial history. However, borrowers still need to meet the SBA’s eligibility criteria, such as being a for-profit business, operating in the U.S., and being unable to obtain credit elsewhere.
- Counseling and education: Some SBA equipment loans come with continued support to help borrowers start and run their businesses. The SBA and its partners, such as SCORE, Small Business Development Centers, and Women’s Business Centers, offer free or low-cost mentoring, training, and technical assistance to SBA loan recipients.
How to apply for an SBA equipment loan
To apply for an SBA equipment loan, borrowers need to follow these steps:
- Find a lender: The first step is to find an SBA-approved lender that offers equipment loans. Borrowers can use the SBA’s Lender Match tool to find lenders in their area, or contact their local SBA district office for referrals. Borrowers should compare different lenders and their terms and conditions before choosing one.
- Prepare a business plan: The next step is to prepare a detailed business plan that explains the purpose and goals of the equipment purchase, as well as the expected revenue and expenses. The business plan should also include information about the business’s history, management, market, and financial statements. The SBA provides a free business plan template and a guide on how to write a business plan.
- Gather the documents: The third step is to gather the necessary documents for the loan application, such as personal and business tax returns, bank statements, income statements, balance sheets, cash flow projections, and legal documents. The specific documents required may vary depending on the lender and the loan program. The SBA provides a checklist of common documents for SBA loans.
- Submit the application: The final step is to submit the loan application and the supporting documents to the lender. The lender will review the application and perform a credit check, a background check, and a collateral appraisal. The lender will then decide whether to approve or deny the loan, and notify the borrower of the decision. The approval process can take anywhere from a few weeks to a few months, depending on the loan program and the lender.
Comparison of SBA equipment loan programs
| Loan program | Maximum loan amount | Interest rate | Repayment term | SBA guarantee |
|---|---|---|---|---|
| SBA 7 (a) loan | $5 million | 11.5% to 15% | Up to 10 years | Up to 85% |
| SBA CDC/504 loan | $5.5 million | Based on market rate | 10 years | 40% |
| SBA microloan | $50,000 | 8% to 13% | Up to 6 years | None |
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