For most businesses, equipment is a paramount consideration for success. Without the right model of equipment with the appropriate capacity, your business cannot reach its full potential. As your business grows, its equipment requirements are likely to grow as well. When the time comes to replace your equipment or add pieces to it, you have several financing options, including a Small Business Administration (SBA) 504 loan.
Equipment Financing Options for Small Business
There are multiple business loan options for equipment purchases, just as there are for other business expenses. As is the case of real estate, you often have the option of leasing instead of buying it. Because the service life of a piece of equipment can range from a few years (in the case of rapidly developing technologies) to many decades, and can have a price range that is just as broad, your equipment financing strategy will be highly individual.
Short-term leasing is a good option for equipment that will become outdated very fast. This might be medical equipment, high technology or anything that is used so intensively that it wears out within a few years. You can take it, use it and return it. Leases do not appear on your credit record, although your payment history will likely be reported. It is generally easier to receive approval for a lease than a loan, but leasing may cost more than a loan. In any case, it is important that your lease or loan have a term that is no longer than the service life of the equipment. Otherwise, you will find yourself still paying for old equipment while you are financing its replacement.
It is a good idea to consult a tax expert while planning your equipment acquisition. The full cost of leasing may be tax deductible (as compared with just the interest for a loan), but your equipment can be depreciated if you own it. Depreciation rates vary by type of equipment and other factors, but depreciation can have a major positive impact on your tax bill.
Banks may offer up to 100% financing (that is, a loan with no down payment) at interest rates starting at 4% with a variety of terms. Depending on your qualifications, they may require a down payment of up to 20% and charge an interest rate over 10%, however, and there is likely to be a balloon payment as well. Even so, only the most highly qualified borrowers will receive bank loans. Online lenders will make loans more readily, and usually faster, than banks, but their interest rates start around 12% and can go much higher. They may also offer shorter terms.
Financing Your Equipment Purchase with an SBA 504 Loan
One affordable and flexible option for equipment financing is the Small Business Association (SBA) 504 loan. Equipment purchases can be financed with a 504 loan if the equipment has a service life of ten years or more. A 504 loan can also be used to:
- purchase land or buildings
- construct, upgrade or renovate buildings
- refinance conventional debt
The 504 loan is issued in a partnership between a conventional lender (a bank or credit union) and a Certified Development Company (CDC) like TMC Financing that administers the SBA portion of the loan. A 504 loan has three parts:
- The first is a loan from a conventional lender for at least 50% of the total amount. You and that lender determine the amount and conditions of that loan, which becomes your first mortgage. If you do not have a conventional lender already, TMC can help match you with the perfect banking partner for this loan.
- Your CDC facilitates a separate SBA loan of 40% of the total, up to $5 million, at a fixed, below-market rate. You can receive up to $5.5 million for projects eligible for the SBA’s Green Energy Program. This is your second mortgage.
- Finally, you, the borrower, contribute 10% to the loan as down payment.
Because the conventional lender receives first lien position, the loan is a low risk for them, which makes you a more attractive borrower. The 504 loan has term options of 10 and 20 years, with a 25-year loan to be available soon. The 504 loan never has a balloon payment.
TMC Client Successes
Heritage Solutions has obtained two 504 loans from TMC. After using a 504 loan for the $10.5 million purchase of a 230,000 square foot warehouse in Lathrop, CA, the company borrowed $7.2 million to purchase a custom precision printer. Heritage Solutions designs and produces customized packaging and offers the most advanced digital printing in North America. Their success is heavily reliant on the quality of their equipment.
Koreana Plaza owner Byong Yu has also obtained two loans from TMC. He secured a 504 loan for a $1.8 million project to buy the land and build his store in Oakland, CA. He also used a 504 loan to finance the Koreana Plaza Market in Sacramento. The $17.7 million project included purchasing a building, making improvements to it and purchasing and installing HVAC, refrigeration equipment, loading equipment and vehicles. The equipment accounted for $1.5 million of the total project cost.
Folktale Winery & Vineyard financed its $12 million purchase of property and equipment in Carmel, CA with a 504 loan. Of that sum, $1.5 million was for a bottling line, wine press, forklift, fermenting tanks, large-capacity stainless steel tanks, a 5-ton bridge crane, 700 wine racks and imported 1000 oak wine barrels.
The 504 loan is an accessible and reliable source of financing that should be considered carefully among the options available to finance equipment purchases.
You can find out more about equipment financing from one of TMC Financing’s 504 loan experts. TMC is an SBA Premier Certified Lender and a high-volume loan provider. With over 35 years of experience, TMC can help you find the financing that is best for you and guide you through the 504 loan process. Contact TMC Financing today.
- Using the SBA Green Energy Program to Increase Commercial Financing - April 18, 2023
- What Is a Certified Development Company? - May 12, 2022
- The SBA 504 Program: Why It’s an Optimal Finance Solution for Self-Storage Operators - June 22, 2020