Buying new equipment for your business can be expensive. Many business owners take advantage of equipment financing to reduce the immediate financial burden of purchasing expensive equipment. Equipment financing allows you to buy the essentials that your business needs without paying thousands of dollars upfront and depleting the amount of money you have available.
Borrowers with poor credit may be approved for equipment loans, although this is more difficult. For those with fair or low credit scores, we explain what you can do to put yourself in the best position for equipment financing.
What is equipment financing?
Equipment financing is a type of business loan in which the product pays the cost of new or used equipment. Funding can be used for many types of equipment, including appliances, vehicles, electronics, machinery and heavy equipment. These loans, however, cannot be used for payroll, real estate, or to pay for other expenses. [Looking for financing for your business? Read our reviews of the best small business lenders.]
When you take out an equipment loan, you are usually charged a fixed interest rate and have repayment terms that can last for several years. Once the term loan is paid off, you own the equipment. It is similar to financing the purchase of a new car or house.
âEquipment financing is a pretty common need,â Melissa Wylie, senior small business writer at LendingTree told business.com. “It is expensive for many business owners to purchase the equipment in advance.”
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How Does Equipment Finance Work With Bad Credit?
Small business owners with good credit scores will have no problem getting approval for equipment financing. But those with bad credit can. Most lenders have a credit score threshold to be approved for equipment financing. (This threshold will vary among lenders.) If you fall below this threshold, it is more difficult and more expensive to get a loan. After all, the interest rate you pay on business loans is based on your credit score.
There are equipment finance lenders who finance borrowers with poor credit. They look at other aspects of the borrower’s financial position, such as annual gross sales and how long the company has been in business. With equipment loans, it helps if the loan is secured by the equipment. If you default on the loan, the lender gets the collateral.
When reviewing loan offers from lenders, it is important to look into the terms before signing the agreement. Fees may vary among lenders.
âIt depends on the financial company you are working with,â said Drew Giventer, CEO of Accountable Capital. “Some companies are not reputable. You have to read the fine print”
You can still get equipment financing; it just requires a little more finesse.
Take guarantees. When financing the purchase of equipment, the equipment serves as collateral. If you fail to repay the loan, the lender can seize this equipment. For a small business owner with poor credit, it may require more than that. You may need to offer real estate or other asset as additional collateral to be approved. (If you are unable to repay the loan, however, the lender can take both collateral.)
A 20% down payment is also a common requirement among lenders. If you want to increase your chances of getting approved, offer a deposit of more than 20%. This, combined with the additional collateral, will likely increase your chances of being approved for the loan.
When applying for equipment financing, lenders may ask you to submit a business plan. This is especially true for finance companies that rely on more than your credit score when considering your application. Updating and / or improving your business plan can make your business more attractive to the lender. It is also prudent to demonstrate strong cash flow. If you can show that you always have more money coming in than going out, a lender can ignore a bad credit rating.
If the above recommendations do not lead to approval, it may be time to consider a co-signer, someone who agrees to repay the loan if you fail to make your monthly payments. The lender examines the credit score of the co-signer in addition to your score. Having a co-signer can increase your chances of getting approved and getting better loan terms, such as a lower interest rate.
âIt’s always a good idea with any type of business financing to shop around to see what you can get from various lenders,â Wylie said. “Don’t be afraid to turn down an offer you can’t afford. You have to be careful about financing. Make sure you get an arrangement that really works for you.”
What are the advantages and disadvantages of financing equipment with fair credit?
With any type of loan, there are pros and cons. Only you can determine whether the advantages you receive from the loan, such as the equipment you need, outweigh the disadvantages.
Benefits of financing equipment with poor credit
- Preserves cash flow. While you can afford to purchase the equipment directly, financing it over a period of time can help preserve cash flow. The last thing you want to do is face cash shortages because you used a large amount of money to upgrade your equipment.
- Quick turnaround time. If you are looking for financing to replace defective equipment, time is of the essence. The more you do without it, the more damage your business can suffer. When financing the purchase of expensive equipment, don’t be unrealistic with the concern of saving money. If you’re able to get the financing and equipment you need with decent terms and minimal disruption to your business and cash flow, get your hands on the new equipment.
- Improves your credit. If you finance your equipment and pay your bill on time every month, you have the potential to create a positive credit history, which doesn’t happen if you pay cash.
Disadvantages of equipment financing
- Your credit score can take a hit. Equipment financing can increase your credit score, but it can also lower your credit score when you miss payments or are in default, which will make borrowing more expensive in the future.
- Negative impact on finances. If you finance expensive equipment and can’t afford the monthly payments, you and your operations will suffer. Don’t take out a loan you can’t afford to pay off.
- You could lose more than the equipment. Borrowers with bad credit may be required to provide more collateral that exceeds the value of the equipment financed. If this is the case and you default on your loan, not only do you lose the equipment, but you also lose the collateral you provided.
âIf you can’t pay off the debt, don’t borrow,â said Matt Vannini, president and CEO of Restaurant Accounting Services. “It sounds trite, but it’s true.”
Vannini recommended creating a budget that takes into account possible surprises. This can help you afford the loan, even in tough times.
Which companies offer equipment finance for poor credit?
Balboa Capital provides small business owners with less than exceptional credit access to equipment finance loans. There are no hidden costs, equipment loans are quick to finance, and you may not need to provide collateral. Balboa works with borrowers that other lenders have turned down. To qualify for a Balboa Equipment Finance Loan, which reaches a maximum of $ 250,000, you must have been in business for at least a year, generate annual income above $ 300,000, and have a decent credit score.
National Business Capital & Services serves small business owners with credit problems. It doesn’t charge an upfront fee, it offers secured and unsecured loans, and you have the option of purchasing equipment from any vendor you choose. (Some equipment finance companies have partnerships with manufacturers, which limits your choices.)
eLease provides equipment financing to small and medium-sized businesses regardless of their credit history. eLease considers applicants with all types of credit scores and does not have a minimum years of activity and annual income. However, you must provide a personal guarantee.
Smarter Finance USA is prepared to work with applicants who do not have high credit scores. Smarter Finance USA has no minimum annual income requirement and considers startups.