No Credit Check Equipment Financing: Does it Exist?
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You might have heard that equipment loans come with less-stringent requirements than other types of loans. Although that could be true in some instances, it’s virtually impossible to escape a credit check when you apply for equipment financing.
Successful borrowers typically have good to excellent credit and an established, profitable business. But you aren’t totally out of luck if you don’t fit that credit profile perfectly — you can use a variety of loans from a wide range of lenders to fund your equipment.
What is an equipment loan?
Borrowers typically use equipment loans to finance equipment that’s too expensive to buy outright, but not so expensive that a lease is a more sensible option. The equipment you are financing usually secures an equipment loan, which makes it safer for lenders than other kinds of loans.
Equipment loans might come with more relaxed requirements regarding years in business and credit score. Lenders typically finance from 80 to 100 percent of the cost of the equipment and might not require a down payment. You might also be able to secure flexible repayment terms, such as deferring your first payment or using a quarterly or annual repayment schedule.
The Small Business Administration’s CDC/504 Loan Program is geared toward businesses that need to buy machinery or other major business assets. The program, run through nonprofit partners focused on community economic development, aims to help businesses bolster their local communities through updates or expansions, which results in hiring. Various private lenders including major banks and online lenders offer loans specifically for equipment loans.
Equipment loans are most common for companies that use heavy equipment for daily operations or for those just starting out. Farmers, construction companies and airlines have high equipment overhead, but many other industries can benefit from these types of loans, too.
What is equipment leasing?
Leasing equipment is the best way to get what you need quickly, especially if the equipment you’re looking for is very expensive. Compared with a loan, leasing requires little-to-no upfront cash or credit, and you can even test the equipment for a short period of time. Lease agreements sometimes include maintenance costs, and lease payments are typically tax deductible.
The main disadvantage of leasing equipment is the the cost over the equipment’s lifetime is usually higher than if you had just purchased the equipment. If the loan you use to purchase the equipment has a high interest rate, however, leasing might be a better and cheaper option.
Another potential issue with leasing is that you’ll need to find a replacement for the equipment once the lease is up, which can be a hassle and costly. It’s important to note that depreciation on leased equipment isn’t usually tax deductible.
Equipment leases fall into two categories: operating leases and capital leases (the latter will be called finance leases starting at the end of 2018). These types of leases differ in various ways, depending on whether the lessee plans to take full ownership of the asset after the lease period (capital) or revert the equipment to the lessor (operating).
Under current accounting rules, these leases are treated differently: You keep operating leases off the balance sheet but include capital leases on it. Under new rules that go into effect on December 15, 2018, both of these types of leases must go appear balance sheets, which will enable you to claim depreciation and interest expenses and also take on additional tax obligations.
When evaluating an equipment lease, look at the length of the lease (shorter leases usually involve higher monthly payments) and whether there is a buyout option that allows you to purchase the asset when the lease period ends. You should also check if there are penalty fees for terminating the lease early.
When to finance business equipment?
There are several different scenarios in which it makes sense sense to finance your equipment. Here are a few examples:
Company startup. When just getting started, businesses need a lot of equipment just to perform basic functions. Although a general business loan can often cover these needs, a dedicated equipment loan often comes with lower restrictions and more flexible repayment terms.
Equipment breakdown. Sometimes it’s savvier to buy new equipment instead of repairing broken stuff. This is especially true if the broken equipment was getting out of date. In these instances, an equipment loan can get you a cutting-edge device that might even be more efficient or eco-friendly.
Outdated equipment. Technology and trends moves fast, making it almost impossible to avoid future equipment purchases. This is especially true for companies in high-tech industries — such as medical science — that frequently incorporate technological advancements into standard methodologies.
Want to own instead of lease. Leasing is usually more expensive than buying new equipment outright. Depending on the terms of the lease, you might have to give the equipment back when the lease is up. If you’d rather own your equipment — because the terms would be more affordable or you want to keep the equipment for good — getting a loan to purchase equipment might make more sense.
Looking for an equipment loan? Check out our top picks for equipment financing companies.
How to get an equipment loan
Because the equipment serves as collateral, getting an equipment loan tends to be easier than other kinds of loans. Here are several things you’ll likely have to provide when applying for an equipment loan:
1. Credit score
Although credit requirements for equipment leasing tend to be more lenient than for other loan types, bad credit will still be an issue for any business owner. It’s essential to maintain a good credit score, both personally and for your business.
Each lender sets its own standards about what constitutes good and bad personal credit scores, but according to the FICO credit score guidelines, anything below 600 is bad and anything above 670 is good. There are several credit reporting agencies that use business credit scores, including Dun & Bradstreet, Equifax, Experian, and FICO.
2. Down payment
The amount of your down payment will depend on your situation, including your credit score. Down payment requirements typically range from 8 to 30 percent, but some lenders might allow you to put zero down.
For SBA CDC/504 loans, businesses are usually required to provide a down payment of 10 percent to 15 percent to get 85 percent to 90 percent financing. In some situations, you might be able to secure 100 percent financing with no down payment.
3. Business plan
Lenders might request to see your business plan as part of your application. If the plan and your stated need for equipment don’t align properly, the lender might be skeptical about your ability to put the equipment to profitable use.
4. Cash flow statements
Lenders might also require cash flow statements from your business so they can assess your company’s financial health.
Features of equipment loans
Equipment loans have many of the same features as other loans and might even offer more lenient terms. Here are some things to look for when considering an equipment loan:
Down payment. You won’t necessarily be required to put money down to secure an equipment loan, but it can reduce the total amount of the loan you’ll be repaying and might enable you to secure better terms. Typical down payments for equipment loans range from 0 percent to 20 percent, with many in the 10 percent to 20 percent range. Some borrowers with poor credit might be required to put down as much as 30 percent.
Interest rates. Just like with others loans, you’ll be required to pay interest on the money you borrow for equipment.
Loan term. Equipment loans should match the expected lifespan of the equipment they are financing. This typically means that these loans have terms of two to seven years, with the expectation that equipment will break, no longer be needed or need to be replaced in that time period.
Trade-in options. Some equipment loans let you trade in the equipment for an upgrade; however, there could be timeline restrictions involved. You might get dinged for trading in your equipment too early.
Collateral. In most cases, the lender will use the equipment you’re financing as the collateral to back the loan. You won’t have to offer other business assets or give a personal guarantee to secure the loan.
Default rules. The lender will repossess your equipment if you default on the loan. Additionally, if the value of the equipment declined since you took out the loan, you might have to pay the difference between the current value and the remaining balance on the loan.
Alternative loan options
Dedicated equipment loans aren’t the only way to financing equipment. Many, if not all, business loans can cover equipment purchases. A credit card or line of credit might even be enough for equipment purchases in the low thousands.
Personal loan. You can take out a personal loan to use for business purposes. This can be a simple way of getting funds, but remember that it won’t help to build your business credit.
General business loan. A term loan for your business can also cover the cost of new equipment. A short-term loan might be a good option if the equipment you’re financing will help you rapidly increase cash flow, such as an ice cream machine for an ice cream shop. A microloan might be a good option for small pieces of equipment, such as chairs or printers, if you don’t have the cash on hand.
Business credit card. You might consider paying for equipment with a business credit card, but watch out for your credit limit and the very high interest rates. The best business credit cards will offer an introductory rate — such as 0 percent interest on new purchases for the first year — or offers rewards on card purchases.
Business line of credit. A business line of credit provides readily available access to cash, but offers lower interest rates than credit cards.
Bottom line: How equipment financing stacks up
Equipment financing is just one form of business financing. Although it might be somewhat easier to secure a collateral-backed equipment loan, it’s still important to have good credit or you won’t get approved for the loan.