How to Find Heavy Equipment Financing for Your Business
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Your construction or contracting business needs heavy equipment, but you don’t have the cash to pay for it in full—that’s where financing comes in.
Heavy equipment financing, also called construction equipment financing, is a type of equipment financing that funds the purchase of new or used industrial machinery such as heavy trucks, engineering equipment, bridges, tunnels, utilities, excavation, and concrete and asphalt. It’s used by businesses ranging from farmers to loggers to landscape contractors.
Although most banks require collateral to secure a loan, some lenders let you use the equipment as collateral, so the borrower’s other assets are not at risk. It also means you are likely to get better loan rates on heavy equipment than with other types of small business loans.
How long does it take to secure financing
The time from application to funding varies and will depend on the type of lender. Generally, banks have a longer approval process with more paperwork. The process can take weeks, including the time it takes for the funds to be made available.
Alternative lenders offer a more streamlined process with a fast turnaround, which is what’s most appealing about these lenders. Numerous alternative lenders claim that loan decisions will be made within 24 hours of application, which translates to money deposited in the borrower’s account within days to buy that necessary machinery.
Heavy equipment leasing vs. financing
In general, for long-term equipment use, buying is more cost-effective, it’s deductible, and the equipment will always be there when you need it. However, leasing equipment, which is like renting for a predetermined period, is another choice for businesses that don’t have a lot of capital to put towards heavy equipment. When the lease is up, you will either return the equipment or you may opt to buy it at a predetermined price, like a rent-to-own plan with a car.
Heavy equipment leasing can also be a quick and streamlined approval process.
Here are some cases when leasing may be the better choice:
- You need equipment that gets outdated quickly
- You need equipment that is highly specialized
- You need the machinery for a short-term job
- You have a long-distance project and don’t want to pay to transport the equipment, so you lease it locally to the work site
- You want to save on long-term storage costs
Vs. cases where financing is the better choice:
- You need the equipment long-term
- The equipment you want can be used for many jobs
- You want to make a cost-effective purchase
- You want to take advantage of the significant tax deductions available for major business equipment purchases.
The cost of leasing depends on the level of risk the applicant poses. The applicant with bad credit or a recent bankruptcy will pay much more to lease equipment. For example, a $50,000 piece of heavy machinery might cost around $1,100 per month with good credit (675 credit score and up). With bad credit (below 600), however, you may be looking at around $2,450 in monthly payments.
Use this handy calculator to help determine if you should purchase heavy machinery outright or lease the equipment.
Shop and apply for heavy equipment loan
This type of financing is offered by traditional banks, heavy equipment dealers, heavy equipment financing companies and other alternative lenders.
Banks require the most paperwork and will want to see strong financial records. Bank financing may come with limitations based on the vendor of the heavy equipment; however, banks also tend to offer the longest terms and the most affordable rates. They may also charge fees for the application process, schedule fees and other fees.
The underwriting process may require the following paperwork:
- bank statements
- equipment quote or invoice from the vendor or distributor
- company tax returns or audited financials
- personal tax returns for all guarantors.
To qualify, applicants for traditional bank financing may need to be an established business and meet the minimum income requirements. At Bank of America, for example, applicants must be in business at least two years under the current ownership and show at least $250,000 in annual revenue. Qualifying revenues can range from around $125,000 to $300,000 with lenders, or about $5,000 to $10,000 per month. New businesses or businesses that can’t prove they have the required monthly gross income may have to consider easing their equipment.
Dealers of new construction equipment require excellent credit (720 or higher) in order to finance, but for those who do qualify, the rates are very appealing.
Alternative lenders may require just the online application to get started. One online lender advertises a 90% loan approval rate plus no limitations on equipment vendors. Another lender has a no-paperwork application process and also doesn’t require any financial statements for loans up to $250,000—these lenders tend to have the highest rates in heavy equipment financing.
Check out our top picks for equipment financing companies here.
How much does heavy equipment financing cost?
As with any kind of loan, it’s more of a challenging to secure heavy equipment financing with bad credit (A FICO score of 699 and below is considered fair to very poor), low revenues and low cash reserves. Heavy equipment financing rates are determined on a case-by-case basis, based on the following factors:
- equipment cost
- whether you are financing or leasing
- personal credit
- length of time in business.
Your funding will be up to 100%, but (depending on your credit profile and history) you may have to make a down payment to receive the funds.
You can improve your chances of securing heavy equipment financing with bad credit by getting a cosigner, putting up collateral, making a large down payment or providing evidence of a thriving business.
Tax advantages of heavy equipment financing
You can reap a tax benefit in the first year of financing with the Section 179 deduction. It allows for up to $1 million in equipment to be deducted the year you purchase the equipment. You don’t have to depreciate, although that is an option if you don’t take the Section 179 route.
If you’re leasing, in some cases payments can be written off as operating expenses.
Heavy equipment financing is available to both new and established businesses with good credit and not-so-good credit, from many sources and in various terms. The decision to finance or lease business equipment will ultimately be dependent on the type of equipment, length of time you need to use the equipment and your overall financial health.