Small businesses often rely on equipment to drive their operations and achieve growth. However, acquiring or upgrading equipment can be a significant financial burden. In such cases, small business owners often turn to various financing options, including SBA loans. This article aims to provide an understanding of SBA equipment loans, their benefits, and highlight other viable financing alternatives available to small businesses.
Overview of SBA Equipment Loans
SBA equipment loans are a financing option offered by the Small Business Administration (SBA) to assist small businesses in acquiring equipment. The SBA does not directly lend the funds; rather, it provides a guarantee to approved lenders, reducing the risk and encouraging them to extend credit to small businesses. However, it is important to note that standalone SBA loans specifically for equipment are relatively rare. SBA equipment financing is typically bundled with a larger SBA loan, such as when purchasing a business and including some equipment in the loan package.
Advantages of SBA Equipment Loans
Longer repayment periods
SBA equipment loans often provide longer repayment periods of ten years compared to conventional financing options of three to seven years. This extended timeframe allows businesses to spread out the loan payments over a more manageable schedule, reducing the strain on their cash flow. The ability to make lower monthly payments can help businesses allocate their financial resources more effectively, ensuring smoother operations and enabling them to invest in other areas of the business.
Our SBA loan calculator is a helpful tool to determine equipment loan payments and highlights the difference between five- and 1-year loan payments. For example, at current rates a $100,000, 10-year loan would have payments of $1,322 a month if ten years. The same loan at a ten-year term, which is typical with conventional loans, would be $2,125 per month.
A component of an existing SBA loan request
One notable advantage of SBA equipment loans is their ability to be easily bundled as part of an existing SBA loan request. This means that small businesses seeking financing for both equipment acquisition and other purposes, such as buying a business or expanding operations, can consolidate their funding needs into a single loan package. Bundling the equipment loan with an existing SBA loan simplifies the application and approval process, streamlining paperwork and potentially reducing overall administrative burden for the borrower.
Disadvantages of SBA Equipment Loans
Potentially Higher Interest Rates
Interest rates on SBA loans may be higher than alternative options such as leasing, vendor financing, or traditional commercial loans. It is crucial to compare interest rates and total costs to determine the most cost-effective financing solution. Current SBA loan interest rates are at or below the following maximum rates set by the SBA:
| Loan Amount | Fixed+ | Prime | SBA Max Interest Rate |
|---|---|---|---|
| $50,000 - $5,000,000 | 3.0% | 8.5% | 11.5% |
| $25,000 - $50,000 | 4.0% | 8.5% | 12.5% |
| <$25,000 | 5.0% | 8.5% | 13.5% |
Longer Loan Process
SBA loans generally involve a more extended application and approval process compared to traditional equipment financing options. The additional paperwork and due diligence requirements may result in longer processing times, which may not be suitable for time-sensitive equipment needs.
Tougher Credit Standards
SBA loans often have stricter credit requirements compared to vendor financing or leasing options. Small businesses with lower credit scores may face challenges in obtaining SBA financing. Exploring alternative financing options may be more suitable for businesses with limited credit history or lower credit scores.
Final thoughts
SBA equipment loans can be a viable financing option for small businesses seeking to acquire or upgrade equipment. They offer favorable terms and access to capital that supports business growth. However, it is essential to recognize the potential disadvantages associated with SBA equipment loans, such as higher interest rates and a lengthier loan process. Small business owners should evaluate alternative financing options, such as leasing or vendor financing, to determine the most suitable solution for their specific equipment needs.
We commonly see borrowers include SBA equipment financing as part of their overall SBA loan request, which is typically less than 25% of the overall loan request. However, it is rare to find a purely dedicated SBA equipment loan since borrowers have other financing options available to them. Our Lender Connect tool offers an excellent opportunity for you to be connected with SBA lenders who specialize in providing equipment financing.