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Obtaining equipment financing with bad credit isn’t impossible. But just as with any other type of financing, when you have poor credit, you may have to alter your expectations and do some extra legwork in order to get approved.
Keep reading to learn more on how you can increase your chances of getting equipment financing with bad credit.
Key Points
• Equipment financing can allow businesses with poor credit to secure funding by using the purchased equipment as collateral, making approval requirements more lenient than traditional loans.
• Strengthening loan applications can involve offering additional collateral, increasing down payments beyond standard requirements, and presenting updated business plans with strong financial projections.
• Online lenders may provide more flexible lending requirements compared to traditional banks, though they may charge higher interest rates for businesses with problematic credit histories or startups looking for equipment financing.
• Adding a cosigner with strong credit and stable income can significantly improve approval chances and potentially help you secure more competitive loan terms and lower interest rates.
• Building business credit before applying by separating personal and business finances, making timely payments, and working with vendors who report to credit bureaus may improve future financing opportunities.
What Is Equipment Financing and How Does It Work?
Equipment financing is a form of financing in which you detail to the lender the business-related equipment that you plan to acquire with the financing. If the lender approves, the equipment itself serves as collateral for the financing. Having this security can mean that the lender is more lenient about qualifications for the financing and/or offers more favorable terms. Equipment financing can sometimes cater to specific industries, such as medical equipment financing and farm equipment financing.
Equipment Loans vs. Equipment Leasing
An equipment loan is, literally, a loan. You will likely be required to make a down payment to the lender, and you’ll have to repay the loan, with interest, at set intervals. You’ll build equity in your equipment, but generally you will be responsible for any maintenance or repairs needed.
In contrast, equipment leasing means that you are borrowing the equipment from a company and will pay a leasing fee. You won’t build equity in the equipment, but some leasing companies may offer you the option to purchase it at the end of your lease. You often won’t be responsible for repairs and maintenance on the equipment.
Why Credit Scores Matter for Equipment Financing With Bad Credit
When you have bad credit or own a startup, equipment financing may be a good option, assuming that you’re seeking funding in order to get equipment you need for your business. Since the equipment acts as collateral for your loan, some lenders may be less strict about credit score requirements. However, many lenders may take a poor score as an indicator that your business may not be creditworthy and be reluctant to extend any kind of financing to you.
What’s more,having a good credit score can still mean that you may be able to access more favorable interest rates, higher loan amounts, lower down payment requirements, and/or longer repayment terms.
How to Get Equipment Financing with Bad Credit
If you have bad credit or own a startup with no credit history yet, the following options may help you secure equipment financing:
1. Start with Existing Bank Relationships
Established businesses may begin the search for equipment financing with a bank or lender they already work with. Even when looking for equipment loans for bad credit, potential borrowers might consider starting their search for any kind of small business loan at an institution with which they already have a relationship.
Depending on the financial institution, there may be programs that offer rate discounts or other perks to existing customers, even ones with problematic credit histories. That’s why, when you’re shopping for equipment financing with bad credit, it’s worth it to start your search with your current bank.
2. Consider Equipment Leasing
Another option for getting the equipment you need for your business is to lease it rather than purchase it. While an equipment loan may require a sizable down payment, you might be able to finance the entire cost with a lease.
Be aware of the interest and other requirements when leasing equipment. Some leases may require a maintenance package or have a high interest rate. These fees and added costs can sometimes make leasing equipment more expensive than purchasing it.
3. Offer Additional Collateral
When applying for bad-credit equipment financing, consider offering additional collateral. Even if you have good credit, lenders may require a down payment in addition to the equipment serving as collateral. But equipment financing for bad credit can come with stricter requirements. Some lenders may accept additional collateral — such as other hard assets like real estate — to help secure the loan.
Just remember that any collateral used could be seized and liquidated by the lender if you default on the loan, even if it’s personal property like your home or savings account. Review your business financials carefully to make sure you’re comfortable with your ability to repay the loan. Otherwise, you may put more at risk than just the equipment you’re financing.
4. Increase Your Down Payment
Another way to make your application more attractive to lenders is to make a larger down payment than the 10% to 30% you may be asked for. This may only work for businesses with large cash reserves, but it could be a workaround to get equipment financing with bad credit. After all, with bad credit it would likely be challenging to get equipment financing with no money down anyway.
Also, a larger down payment results in a lower loan balance, which could mean a smaller monthly payment and less total interest paid over the course of the loan. Review the loan terms, fees, and interest rates closely to evaluate how a larger down payment could impact the overall cost of your loan. While not every business will be able to pull this off, it does offer benefits for those who can.
Recommended: How to Dispute a Business Credit Report
5. Update Your Business Plan
Depending on the lender you apply with, you may need to submit a business plan as part of your application. A strong business plan can highlight your business acumen and could help you demonstrate how the equipment purchase will help grow the company.
A business plan contains several elements, including an overview of the company and structure, market analysis, operations, and financial projections. It can provide in-depth data to show the lender that there’s a market need for your product or services and that you’re successfully managing both operations and business cash flow. You could also include a section outlining your funding request, especially if you’re applying with a traditional bank or lender.
Recommended: Restaurant Equipment Financing
6. Get Your Company Financials in Order
No matter what type of lender you apply with, you’ll most likely need to submit your company financials. You may also need to provide some documentation of your personal finances, as well. Consider pulling together the company’s recent tax returns, plus bank statements from the last several months.
Your application for business equipment financing with bad credit may be strengthened if you are able to demonstrate a strong cash flow. This can help show lenders that your company has the money to make the required monthly payments, even if your credit history either isn’t established yet or has some blemishes from the past.
7. Use a Cosigner
Adding a cosigner to your bad-credit equipment financing application may also help you qualify for a loan. Generally, a cosigner is someone who has a strong credit score and stable income. Applicants with lower credit scores may have a better chance of being approved for equipment financing when applying with a cosigner and may even qualify for more competitive loan terms, such as a lower interest rate.
The downside, of course, is that the cosigner has equal responsibility for the equipment loan as you do. If you are late on payments or end up defaulting, that negative activity will impact your cosigner as well.
8. Apply with Online Lenders
It can be difficult to meet the equipment financing standards of a traditional bank when you have bad credit. Online lenders, on the other hand, may have more flexible lending requirements. Some may offer microloans that are easier to qualify for.
Because these lenders may have less strict requirements, such as a lower minimum credit score, they may offer less competitive rates and terms than traditional lenders. You can usually apply online and get a quote (and potentially approval) within minutes.
As you’re shopping around for quotes, double-check how a preapproval impacts your credit score. Many online lenders only perform a soft pull in the early stages, allowing you to shop around and compare offers before committing to one lender. But if they do a hard credit pull, it could impact your credit score.
Compare Multiple Equipment Financing Offers
If you apply for equipment loans with several companies and are fortunate enough to get approval from several of them, it can be a good idea to take some time to compare these offers carefully. In particular, you may want to review interest rates, fees, any penalties, and the loan term to evaluate which option may work best for you.
Recommended: What Can a Business Loan Be Used for?
Common Equipment Financing Mistakes to Avoid
There are a number of mistakes businesses may make when they apply for equipment financing. For instance, while you’ve probably given some thought to how much money you need, you should also remember to think about how much you can afford to repay on a monthly basis so that you don’t exceed your budget. Setting too short a loan repayment term can be a mistake if it leads to high repayments that your company won’t find sustainable.
Here are a few more common mistakes.
Overlooking the Total Cost of Financing
It can be practical to focus on how much your monthly repayments will be, since those will have the most immediate impact on your budget. However, it’s also important to consider the overall cost of the loan and the total amount of interest you’ll end up paying. If you have a longer repayment term, you may have smaller monthly payments, but you’ll probably end up paying more interest over the long term.
Ignoring Loan Terms and Prepayment Penalties
Before you sign a loan contract, it’s critical to be sure you understand exactly what you’re signing up for. You’ll want to understand all the provisions of the contract, including any penalties the lender might impose if you decide to pay off the loan early or if you make a payment late. It can be a good idea to have an experienced professional review the contract to alert you to any potential issues.
Recommended: Heavy Equipment Financing
Improving Your Chances of Approval
You may be able to boost your chances of getting an equipment loan by preparing yourself to apply and by building up your credit.
Documentation Requirements
These are the documents most commonly requested by potential lenders:
• A business plan
• Financial statements
• Franchise or purchase agreement
• Accounts receivable and accounts payable
• Appraisal of equipment value
• Legal documents showing compliance
Credit Score Improvement Strategies
Factors that lenders may perceive as red flags can include excessive outstanding loan balances and credit utilization, poor payment history, and/or liens or bankruptcies on file. These are all potential areas to work on.
Overall, two of the most common strategies that could strengthen your credit rating are making timely payments and paying down debt.
Another step it may be smart to take is to request your personal credit report. Once you have that in hand, study it and look for mistakes or missing information and send an email or letter to correct your credit record if necessary.
Building Business Credit Before Applying
Even if your business is young, it’s not too soon to start thinking about building its credit. Some steps you can take include:
• Open business-specific accounts
• Keep your personal and business accounts and financial dealings strictly separate
• Make your business-related payments promptly
• Work with vendors who report your payments to a credit bureau
Recommended: No Credit Check Business Loans
The Takeaway
It’s possible to get an equipment loan for bad credit, but you will have to do your homework and keep your expectations realistic.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
Can you get equipment financing with bad credit?
Yes, it can be possible to qualify for regular equipment or heavy equipment financing with bad credit. You may need to spend more time finding lenders who are willing to work with businesses that have lower credit scores. Expect higher interest rates and stricter collateral requirements. Some business lenders may require a lien on the business and a personal guarantee on top of making a significant down payment and using the equipment as collateral.
What equipment loans can I get with a 500 credit score?
It’s possible to find a lender who specializes in working with business owners who have credit defined as “fair” or “poor.” Give yourself some time to explore options so you don’t take an offer with bad terms simply because you’re in a time crunch.
What is no credit check equipment financing?
In theory, no credit check equipment financing refers to a lender that doesn’t look at your credit report when making a decision about your application. In reality, however, a reputable lender will have to pull your credit report, either for your business, your personal history, or both. So-called no credit check financing may come with very high interest rates or large penalties, so review the loan terms carefully.
Should I lease or finance equipment with bad credit?
This depends on whether you’re willing to have less favorable terms for your equipment loan because of your credit challenges. To make the decision, it can be helpful to run the numbers for both options to see what makes the most sense in your case.
How much down payment is typically required with bad credit?
Many lenders require a down payment of 10% to 30% for equipment financing. More may be expected if you have problematic credit. It’s unlikely that you will be able to get equipment financing with no money down.
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