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Heavy Equipment Financing

equipment

How To Get Heavy Equipment Financing

If you’re in the construction business, bulldozers, engineering equipment, forklifts, tractors, and excavators are the foundation of your work. Your business depends daily on core pieces of heavy machinery. If this equipment breaks down, the resulting construction delays can harm customer relationships. The faster broken or worn out machinery is fixed or replaced, the faster your project can get back on track. 

Alternatively, a new and improved machine could save you money by reducing manual labor or making a project go faster. You might currently have to turn down jobs because you don’t have the proper equipment. Investing in new equipment could help you grow your business.

There are many reasons that it could be time for a small business owner to purchase new heavy equipment. Taking out a loan to fund these purchases, and preserving your cash reserves for working capital needs, is often your best choice. If you’re ready to apply for a heavy equipment loan now, you can apply online in just a few minutes. 

But if you want to learn more about heavy equipment financing, here’s the scoop. 

Top Considerations Before Applying for Heavy Equipment Financing

Borrowing capital to fund an investment is often a wiser choice than drawing on cash reserves. If you deplete savings and investment accounts to purchase a new bulldozer, you could struggle to make payroll or other financial obligations if sales dip in a few months. Borrowing capital for large purchases protects your fundamental business. 

In order for borrowing to be successful, small business owners should ask themselves several questions before taking out a loan. 

How much do you need to borrow? 

Heavy equipment performs heavy-duty functions – and has a heavy-duty price tag. A CAT D8T bulldozer costs $30,000 for an older used machine, newer used models run $250,000 to $300,000, and a brand new bulldozer starts at $350,000. Unlike equipment financing – used to finance much smaller equipment purchases – heavy duty equipment financing is a serious investment.

Because of this, not every lender or bank extends heavy duty equipment loans. Before you approach the loan agent at your local branch, put together a rough estimate of how much money you need to borrow. If you need a loan for $250,000 but your bank doesn’t approve loans in that amount, you’ll save time by avoiding lenders who don’t meet your needs.

Before approaching lenders, make a list of the equipment you think you need and price out options. 

Are you already an owner or are you looking to open or acquire a new business?

Maybe you’ve worked in construction for years, just got your contractor’s license, and are ready to strike out on your own. Or, you’re an established company and need to retire your twenty-year-old excavator. Where your business is in its current life cycle influences borrowing decisions and the lenders who will work with you. 

Business owners with several years in business, an established track record of revenues, borrowings, and repayments, and a clear business plan will have an easier time borrowing. Traditional banks and lenders view a history of successful operations as a sign that you present less risk to them. Data from past operations can be used to complete a loan application, and you could have assets such as equipment to pledge as collateral. 

If you’re opening a new company, or opened within the last few months, you have different funding needs. Lenders are wary of business with a  short business credit history, as they have no reference points for loan repayments. They can’t see that you’ve successfully borrowed and repaid a loan in the past. 

With a shorter business history, a lender could ask you to pledge personal assets to secure the loan – such as investment or retirement accounts. They could also ask for a down payment even though the heavy equipment the loan purchases also serves as its collateral. 

It’s next to impossible to get funding from a traditional bank. Working with alternative lenders is your best way to access capital. Knowing your business’s stage in its lifecycle will lead you to the right lenders to approach and how much to borrow.

What can you afford to borrow? 

A loan payment should never jeopardize ongoing operations. Before you apply for a loan, analyze the loan’s payment’s impact on your budget. Can your business’ cash flows cover daily operating expenses and the monthly loan payment? If not, reconsider borrowing that much money. 

A loan payment is made up of a portion of the loan’s capital with interest added to it, spread over the repayment term. Reducing how much you borrow leads to a smaller loan payment because you’re repaying less borrowed capital and the interest due is calculated on a lower amount. Ask your lender for an estimated loan payment when you apply, and use this payment to calculate the loan’s impact on cash flows. And always have a plan for how you’ll repay the loan. 

What is the funding timeframe? 

How long will that forklift last? If the heavy equipment you’re financing has a useful life of five years, don’t take out a ten-year loan to purchase it. 

When borrowing, apply a matching principle to any heavy equipment loan. The loan should be paid off before or exactly when the equipment’s useful life is done. You don’t want to still be making payments on equipment you have to replace. 

Lenders often have standard repayment terms for their loan products. Banks often only lend in two, three, or five year increments, but alternative lenders offer repayment terms of just a few months. If you need more flexibility or want to repay the loan faster, work with an alternative lender. Repaying the loan over a more concentrated timeframe leads to a higher loan repayment but gets you out of debt faster.  

What is your business and credit history? 

In addition to knowing the machinery you want to borrow and how much you need to borrow, your personal credit score and business history is an important part of your loan application. Lenders consider it when evaluating your risk as a borrower, though less so when equipment collateralizes the loan. Small business owners who have a lower credit score could find it harder to borrow, and will pay more for capital. 

Lenders offset risk by charging a higher interest rate. Small business owners with poor credit will pay a higher cost of capital. Before applying for a loan, it’s a good idea to pull your credit report so you know where best to apply. 

With heavy equipment financing, the equipment you’re buying with the loan serves as its collateral. Lenders approve loans for borrowers with lower credit scores because they could repossess and resell the equipment if you defaulted. But you still may pay more for the loan if you have a low credit score or less time in business. 

Do you need a tax break?

Small business owners with enough cash to purchase equipment outright and keep a healthy reserve balance in the bank still might want to borrow. There are several tax breaks you can realize by financing.

Under Section 179, you can deduct the full amount of the equipment purchase (up to $1 million) the year you buy it. If this isn’t your best tax strategy, you can choose to write off loan interest payments as business expenses instead. Another option is to deduct depreciation annually.

Talk to a tax professional about the best strategy to reduce your annual tax burden. Funding an equipment purchase through a loan could have a better overall impact on your business.  consider. 

Best Business Loans Available for Heavy Equipment Financing

While a heavy equipment financing loan is an obvious place to start, it’s not always the best choice for your business if you need money quickly or only need to borrow a small amount. 

Heavy Equipment Financing Loans

Heavy equipment financing loans fund the purchase of a specific piece of machinery. The funds from these loans can only be applied to the equipment purchase, which the lender may want to have appraised. If your credit score is less than 700, they’ll require a personal guarantee.

Heavy equipment financing lenders will only extend enough credit to cover the purchase price, though borrowers with excellent credit can borrow up to 100% of the equipment’s price. Used equipment must be less than 10 years old. Typically, you can borrow up to $150,000, or up to $250,000 if you have a stronger credit profile. Startups who have been open less than one year can borrow up to $25,000, when you reach two years in business you can borrow up to $35,000. 

The heavy equipment serves as the loan’s collateral, so you’ll pay a lower interest rate than an unsecured loan. It can be an easier loan to qualify for, even with a lower credit score, if you’re buying a specific piece of machinery.  

Short-Term Business Loans

If you don’t want to wait for an equipment appraisal, haven’t been in business for a year, or need more than you qualify for under a heavy equipment loan, a short term loan might be your best option. These loans also have the bonus of paying it off quickly, sometimes in just a few months, a great option if you plan to take 100% of the equipment’s cost as a deduction your first year. 

Alternative lenders offer short term business loan with terms of just six to twenty-four months with interest rates of 9% to 45%. To apply for a short term loan you must have been in business for a minimum of two years and need a credit score of at least 650. 

Your construction business’ minimum monthly revenues must exceed $10,000 and there are no prepayment penalties. If you want to pay off the loan quickly – for personal reasons or because you don’t need loan interest deductions in future years – a short term loan could be better for your business than an equipment financing loan. 

Bad Credit Business Loans

Unfortunately, the ups and downs of the construction industry over the past few years could have negatively impacted your business and damaged your credit score. If you had to borrow significantly at some point, and saw your credit score slip, traditional lenders may decline your loan application. 

 Banks reject about the same number as loan applications as they approve. While your credit score could qualify you for bank financing, other factors also lead to a loan application’s rejection, too. They often want to see that you’ve been in business over five years, or have significant cash reserves. 

Alternative lenders offer bad credit business loans to borrowers with blemishes on their credit histories or who can’t qualify for traditional financing for other reasons. You could use the proceeds from those loans to purchase equipment. 

If your business generates minimum monthly revenues $8,000 and you have a credit score above 500, you can qualify for financing with an alternative lender for terms of two to eighteen months. Shield Funding gives borrowers loans in amounts ranging from $5,000 to $1 million, at rates of 12% to 45%. 

If you know that it’s time to take out a heavy equipment financing loan or another loan to purchase the equipment your business needs to be successful, apply for a loan today! It takes just a few minutes online, and your loan could be funded within a few days.