Heavy Equipment Financing: A Beginner’s Guide to Getting Funding

Heavy equipment financing

Need to make a large equipment purchase but not sure where to start or if you’ll even qualify? Heavy equipment financing can help you do just this, but there are many ways to approach it. We’ll walk you through some of the most common solutions and alternatives on this page so that you can make the right decision for your business.

Leasing vs Financing for Heavy Equipment

When you finance your heavy equipment, you own it. It’s yours until you decide you’re done with it. When you lease heavy equipment, it’s not yours. You’re borrowing it for the duration of your lease, though some leases offer the option to buy when the term is over.

There are two main types of equipment leasing: capital and operating.

  • Capital Lease: Intended for long-term access to equipment.
  • Operating Lease: Intended for short-term access to equipment.

Is Financing or Leasing Business Equipment Better?

Financing is usually better if your company’s cash flow is strong, you plan to keep the equipment for an extended period, and the equipment will help you generate revenue.

Leasing is generally better if you won’t need the equipment long or it will become obsolete quickly. It can be better if you’re short on cash or are not a strong borrower yet too, though there are alternative funding methods we’ll cover at the end that can help if these latter concerns are holding you back.

What You Need to Qualify for Heavy Equipment Financing

Finding traditional equipment funding for a small business isn’t always easy. Borrowers usually need to meet specific criteria for credit scores, cash flow, and time in business. Collateral may come into play as well.

Time in Business Requirements

Companies usually need to be in business for at least one year to qualify for traditional equipment funding.

Credit Score Requirements

Most financial institutions offering heavy equipment financing require a minimum credit score of 600, though some start at around 550.

Cash Flow Requirements

Most businesses will need $100,000 in annual revenue to qualify for an equipment loan, though some lenders start at around $50,000. The amount will vary depending on the total amount of funds requested too.

Down Payment Requirements

Most equipment loans require the borrower to put down 20 percent of the initial cost. For example, if you’re purchasing a $100,000 truck, you’ll need to have $20,000 for your down payment. Well-qualified borrowers can sometimes receive a bit more.

Do You Need Collateral?

One of the primary things that distinguish heavy equipment loans from traditional loans is that equipment loans usually leverage the equipment being purchased as collateral. It secures the loan and offers the lender a measure of assurance that they’ll be able to recoup their money if the borrower doesn’t pay. Sometimes lenders will have borrowers sign a personal guarantee and leverage other business or personal assets as collateral as well. It’s usually easier to qualify for an equipment loan than it is to qualify for a traditional non-specific business loan for these reasons.

Can You Get Heavy Equipment Financing if You Have Bad Credit?

Again, the minimum credit score required for an equipment loan is usually 600. This is considered a “fair credit score,” according to Experian. “Poor” credit is a score of 579 or lower. So, although it’s technically possible to get heavy equipment financing with bad credit, it’s unlikely. You also won’t get good terms like you might if you have a score of 740 or more, which is “very good” credit, or 800 or more, which is “exceptional” credit. If you fall into this bracket, you’ll likely want to explore the non-traditional options covered at the end.

Costs and Terms of Heavy Equipment Financing

At this point, you should have a good idea of whether you’ll qualify for heavy equipment financing. Let’s go over what you can expect in terms of repayment and costs.

What Are the Repayment Terms?

Equipment loans are generally term loans, meaning you’ll repay the principal, interest, and fees in installments over a set period. Anywhere from one to five years is common, depending on the amount borrowed and your qualifications, though some offer up to ten-year repayment terms.

How Much Can You Finance?

Heavy equipment loans are designed to finance the total cost of equipment minus your down payment, so some will offer loans well into the millions. It’s similar to how a car loan works. If you’re well-qualified, you can take out a loan that covers all but your down payment for just about any type of car, whether it’s a $5,000 budget car or a $50,000 sports car. Your down payment addresses the immediate depreciation, so if you default on the loan, the loan company can resell the car and recoup any losses.

It becomes a little trickier when your financing company doesn’t understand the value of what you’re purchasing. For example, you may know your “new car” is worth $50,000 because it’s electric, but if the lender you’re working with only understands gas-fueled cars, it may argue that your vehicle is only worth $40,000 and then lower the amount they’ll finance. It’s usually best to work with a lender who specializes in your industry because of this. For example, if you’re in the transportation industry and want to purchase new trailers, you want to work with a transportation lender who can accurately value your trailers. If you’re in manufacturing, you want to work with someone who understands what’s involved in retooling your machines.

What is the Interest Rate on Heavy Equipment Loans?

Anywhere from about five to 30 percent interest is common with equipment loans. Loan fees, such as origination, underwriting, and packaging, will also be applied to the balance.

How Fast Can You Get Approved and Paid with Heavy Equipment Financing?

While it’s technically possible to be approved and funded within a matter of days, many loans and lenders have processes that can drag out for weeks or months.

What Do You Need to Apply?

In addition to meeting the minimum qualifications as outlined above and being comfortable with the repayment terms, you should be prepared to provide prospective lenders with common business documents, including:

  • An invoice for the equipment.
  • Up to three months of your bank statements to demonstrate adequate cash flow.
  • One to three years of tax statements to prove your revenue.
  • Financial documents like profit and loss statements to show you can repay the loan.
  • Additional documents such as business licenses.

Alternatives to Heavy Equipment Financing

If traditional heavy equipment financing doesn’t work for you, one of the alternatives below likely will.

SBA CDC/504 Loan

The Small Business Administration (SBA) offers 504 loans through certified development companies (CDCs) or community-based partners that are regulated and certified by the SBA. Qualified businesses can receive up to $5 million. In these cases, the CDC finances up to 40 percent of the loan, and the SBA backs a portion of this. Ten percent comes from the borrower, and the remaining 50 percent comes from a third-party lender like a bank.

Businesses must have a net worth of less than $15 million and an average net income of less than $5 million over the past two years. Ten and 20-year repayment terms are available. Interest is generally lower than bank rates, though it usually takes five to eight weeks to get funded. It’s also harder to get an SBA loan than it is to get a general equipment loan, as companies are usually required to be in business for at least two years, and the minimum credit score is 680.

Term Loans

An equipment loan is a type of term loan, though the broad term encompasses unsecured loans and loans that use other assets as collateral. Rates vary depending on the lender and what you bring to the table but typically range from six to 25 percent plus interest and fees. Some offer variable interest rates too.

An equipment loan may be easier to qualify for than a general term loan, though the term loan may be more ideal if you intend to use some of the funds on things other than your equipment.

Business Line of Credit

A small business line of credit can occasionally work for equipment too. Unlike most of the options here, there isn’t necessarily a definitive end date for payments. Instead, it works like a credit card. If you draw from the account and then pay the money back, the funds become available to draw from again. Lines of credit usually cap out at around $100,000. The APR may be fixed or variable and can range from seven to more than 35 percent.

Qualifying for a business line of credit is similar to qualifying for a term loan, though lenders often look for additional signs of financial security and/or collateral.

Invoice Factoring

Invoice factoring is a completely different way to address heavy equipment financing. Instead of borrowing the money needed for your business equipment, you’ll sell your unpaid B2B invoices to a third party known as a factor or factoring company. The factor provides you with upfront payment for most of the invoice’s value, then collects payment from your customer. When your customer pays, the factor remits any remaining funds owed to your business, minus a nominal factoring fee.

There’s no debt to pay back because the customer takes care of the balance when they pay their invoice. Therefore, your credit is less of a concern with factoring, too, as the customer is the one who ultimately pays the balance.

The amount available will vary for this reason as well. Your factor will run a credit check and determine how much the customer can reasonably pay. For example, let’s say you serve large oil companies that are fiscally strong but take months to pay their invoices. You may be able to factor a single invoice that covers your full equipment purchase. On the other hand, maybe you own and operate a trucking company. Your clients are smaller, and each freight bill is only worth a few thousand dollars. You may want to factor several invoices to fund your equipment purchase. A good freight factoring or oil and gas services factoring company will work with you to find the right funding for your needs.

Get a Heavy Equipment Funding Quote from Charter Capital

As a leading factoring company with decades of experience, Charter Capital helps businesses in transportation, oil and gas services, manufacturing, and more address their equipment funding needs every day. Our competitive rates, flexible and fast funding, and personalized service make managing heavy equipment purchases easy. To learn more or get started, request a complimentary rate quote.

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