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What documents do I need to apply for an equipment loan?
September 29, 2023
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When you apply for a loan to purchase equipment, the lending institution will provide a list of documents needed to approve your application. This list may vary depending on the lending institution you are working with, the type of loan, and the type of equipment to be purchased. For example, online lenders often minimize documentation to speed up the application and approval process.
In general, here are some of the documents you may need to prove that your company is able to repay the equipment loan.
Business plan
A business plan says a lot about your strategy for growth and profitability. Lenders often require it because they have an interest in knowing the details of your business operations, market conditions and the financial projections you hope to achieve over time. Details to include in the business plan
- Key objectives
- Target market
- Description of products and services
- Marketing strategy
- Market research on competitors and target customers
- Company mission statement
- Current financial situation
- Financial projections, including break-even point
Financial statements.
Lending institutions review a series of financial statements to assess the company's overall financial situation. These statements are used to predict whether the company will be able to repay the loan and to determine the amount of the loan you can receive.
Prepare these financial documents when you submit your application:
- Bank statements to get an idea of cash flow
- Balance sheet, showing assets and liabilities
- Income statement
- Income projections
- Personal and business income statements for the past three years
- Personal and corporate credit history
In some cases, lenders will require personal financial statements or credit reports, particularly if the business is in the start-up phase or if you have no significant business credit history.
Purchase or franchise agreement
If the business has been purchased by others, the purchase agreement is also required. This document should contain information about the buyer and seller, as well as the equipment or assets included in the sale.
It also sets out the responsibilities of the buyer and seller for the business after the sale, which is important if the former owner retains ownership or employment.
Similarly, if your business is a franchise, you will need to provide the franchise agreement that grants the rights to use the franchise mark.
Accounts Receivable and Accounts Payable
In addition to the other financial statements required to obtain a business loan, lenders also need a profit and loss statement showing the income and expenses of the business. It is essential for the lender to see all accounts receivable and payable to understand your current financial situation.
Evaluation
Depending on the type or amount of equipment purchased, the lender may require an appraisal to determine the true value of the company's equipment. The lender is more likely to request this document for used equipment because the appraisal takes into account the current wear and tear on the equipment.
Legal documents
Finally, lenders will need to ensure that the company meets the registration and licensing requirements necessary to operate legally. Documents to be provided are
- documents related to the business entity, such as the company's articles of incorporation
- operating licenses
- commercial lease agreement, if applicable
- contracts with third parties
- employer identification number (EIN).
To find your EIN, you can consult the company's financial records, such as the latest tax returns. You can also contact the IRS directly to obtain this number.
The documents required for an equipment loan are similar to those for other commercial loans, except that the lender may require an appraisal of the equipment purchased. The main goal is for these documents to provide an overview of the company's profitability and the ability of its finances to support long-term loan repayments. The list of documents required is at the discretion of the lender chosen for the equipment loan.
Frequently asked questions
What is an equipment loan agreement?
An equipment loan agreement is a contract under which a lender provides a business with the funds needed to purchase commercial equipment. The contract specifies the fees, repayment terms, and what happens in case of default. It also specifies the collateral used to cover the loan, which is usually the equipment being financed.
Are equipment loans tax deductible?
Yes, you can deduct the annual interest paid on the loan when you file your tax return. You can also deduct depreciation. You can deduct depreciation each year based on the useful life of the equipment. You can also deduct some or all of the cost of the equipment in the first year of commissioning, up to a maximum deduction of $1.16 million in 2023.
What is the interest rate for an equipment loan?
Interest rates for equipment loans can range from 4.99% to 35%, although the exact rates depend on the credit history of the company and the lender. Interest rates on equipment loans are lower than other loans because they are secured by the equipment as an asset, which reduces the lender's risk.
