Equipment loans for business may be as much a necessity as working capital loans. If your business relies heavily on equipment; you need to constantly upgrade it as per project requirements. The equipment also needs to be upgraded to enable fast business growth. Can you finance it via working capital loans? Is a better option available? What is the difference between equipment loans and working capital loans?

If you are considering these questions; here are the answers.

About Working Capital Loans

Working capital loans are funds that help with a business’s day-to-day operations and expenses. These can include wages, salaries, rents, etc. As the name ‘working capital’ suggests; the funds are utilized for the operational needs of a business. These funds are usually for short-term requirements and not for buying equipment or long-term investments.

Businesses that are mostly seasonal or rely on cyclical sales often require working capital. Any business may require working capital. When a business is short on money to fund its short-term operational requirements, a working capital loan may be the solution. During peak business months, a company may not require a working capital loan.

Most lenders offer working capital loans and it is fairly easy to obtain as well.

About Equipment Loans

Equipment loans for business are solely for the purpose of securing funding for new or used equipment. Many businesses rely on equipment and tools. Equipment is also subject to depreciation and you may need to replace it. It can become obsolete also. Your business may need new equipment for business expansion.

Any loan that is taken out for buying equipment for a business is termed an equipment loan.

Not many lenders offer equipment loan. It may be difficult to find a lender that offers good deals on equipment loans for business.

An equipment loan can be used to buy new or used equipment. Lenders fund both types of purchases. Some lenders may also fund auction-based equipment sales.

Some Key Differences Between the Two

. A working capital loan may be given based on the business owners’ credit. If there are defaults in the payments, it may hurt their own credit scores. Unlike the case with working capital loans, equipment loans are generally not linked with business owners’ personal credit. You get the loan based on your business. You may or may not require previous credit history; such as prior equipment financing, mortgages, other loans, etc. Some lenders do not require you to show your previous credit history to obtain equipment loans for business.

. Your lender may or may not ask for a collateral for working capital loans. In the case of equipment loans, the lender may consider the equipment itself as the collateral. It will depend on the lender. But it can be be advantageous for business owners as they don’t need to furnish any other collateral for the loan.

. Working capital loans are simply for expenses. They do not directly aid a business’s growth. It’s merely for sustaining the business in leaner times. In contrast, equipment loans are solely for the purpose of business growth. Equipment not only will sustain your business but also help in its expansion.

. Working capital loans are, thus, an expense only. Equipment loans can help you generate more income. With business growth and increasing profits, you may not even require a working capital loan.

. Working capital loans are not recommended for equipment purchases. If your cash flow was robust, you wouldn’t obtain a working capital loan in the first place. When you have obtained equipment loans for business, you actually free the cash for operational needs. You may get a better deal on equipment loans than working capital loans. So, securing the former can help your business in more ways than one.

. The working capital loan can be used for any operational need for your business. You do not need to generally specify it to your lender. Some business owners even use it to buy equipment. But equipment loans for business is tied to the purchase of equipment. You cannot use it for other business funding needs.

Both working capital loans and equipment loans help sustain a business. You need the right lender for both.