When it comes to equipment financing, there are an assortment of options available to those with bad credit.
It’s important to consider the cost of your borrowing when considering bad credit equipment financing, but for some businesses it can make the difference between thriving or dying.
In this guide, we’ll take a look at how bad credit equipment financing works and some of the pros and cons associated with this form of financing.
How Does Equipment Financing Work?
Equipment financing is a special form of financing that allows business owners the ability to finance large equipment purchases.
In many cases, the equipment is used as collateral for the loan, so you may not be required to put down any additional funds or assets as collateral.
Terms and rates will vary depending on the lender, your business and personal credit, market conditions, and other factors.
Research Lenders Carefully When Comparing Poor Credit Equipment Financing
If you’re just exploring equipment financing options, it’s recommended to start with a broker like Llama Loan so you can compare many different lenders at once, instead of sifting through hundreds of different options.
Additionally, if you have a strong relationship with your bank, you can explore what options they may have – although traditional banking institutions don’t always offer the best rates and terms.
Finally, dealer financing may be an option worth analyzing as it can be fast and convenient for your business. Again, don’t expect them to offer the best rates and terms, but it’s worth examining.
What Documentation is Needed for Equipment Financing Approval?
While your personal and business credit status is crucial for equipment financing, lenders will also want to know about the kind of business you operate.
With this in mind, you should be prepared with a business plan, financial statements, and an analysis of the new equipment’s positive effect on your operations.
If, for example, if you run an embroidery business, you may have outdated sewing machines that slow down your ability to complete jobs. If you invest in a newer, computer-aided machine, you might improve your efficiency, increase revenue, and ultimately your bottom line. Complete an analysis of how much more work you could complete using the targeted equipment. It can also be helpful if you can demonstrate strong demand for your products or services by showing unfulfilled invoices.
Bad Credit Equipment Financing Rates
Rates on equipment financing have a tremendous range—recently between 4% and 30%.
While these rates seem high, they are ultimately determined by the lender you’re working with, your personal and business credit history, market rates, and several tertiary factors.
Your rates will make a huge difference in determining your payment for equipment financing. For example, let’s look at an equipment loan for $30,000 with a term of five years. The monthly payment and total amount paid are much different using a 4 percent interest rate (compounded monthly, also adding an origination fee of 5 percent and a small documentation fee, which would be typical) than with a 25 percent interest rate.
| Loan Amount | Loan Term | Interest Rate | Monthly Payment | Total of Payments |
| $30,000 | 5 years | 4 | $552.50 | $33,149.74 |
| $30,000 | 5 years | 10 | $637.41 | $38,244.68 |
| $30,000 | 5 years | 15 | $713.70 | $42,821.87 |
| $30,000 | 5 years | 25 | $880.54 | $52,832.38 |
Of course, if you lengthen the loan term, the disparity grows. However, it may still be worthwhile for you to accept the loan terms if the equipment helps your business grow and prosper.
Does a Larger Down Payment Help to Lower the Cost of Equipment Financing?
For bad credit equipment financing, you should expect the lender to require a down payment sufficient to demonstrate that you are committed to the project and can invest. Fortunately, equipment financing is secured credit because the equipment you purchase is collateral for the loan. Therefore, if you are able to add a down payment, and you may get a more favorable rate from your lender.
Keep in mind that collateral doesn’t solve all the questions a lender has regarding your bad credit equipment financing. Using the example above, it’s in the lenders best interest not to take possession of your sewing machines (or robotics manufacturing system, or industrial-grade refrigerator) to sell and try to recoup their loss. Instead, they want you to make the payments on time and successfully discharge your obligation.
How to Get Equipment Financing for Bad Credit
If you are having trouble being approved for financing, consider some ways to improve your standing with the lender:
Bring in a co-signer. If you have a business partner (or relative) who will guarantee the loan, that may help you get approval and possibly even a lower interest rate. Just like the lender doesn’t want to repossess your equipment, they also don’t want to chase down your co-signer for payment, but the guarantor’s promise may help.
Offer additional collateral. Like everything else, industrial and other business equipment loses value as soon as you put it into service. If you are looking for a high loan-to-value ratio, you might want to offer other collateral. If you own your property or have paid-off vehicles, you might find an advantage in adding something to the security.
Apply with a range of lenders. As mentioned previously, don’t overlook your local business bank, and also consider credit unions and online lenders. Dealer financing may be an option, but in many cases, they prefer to give financing to businesses with excellent credit.
Pros of Equipment Financing with Bad Credit
Some of the advantages of equipment financing with poor credit include:
- Ability to purchase necessary equipment to grow your business
- Flexible terms that can allow you to use the equipment as collateral for the loan
- Variable maturity lengths depending on the type of equipment being financed
Disadvantages of Equipment Financing with Poor Credit
Some of the cons that come with equipment financing with bad credit include:
- Can be a more costly type of financing in the long-term
- May be required to provide additional collateral
Make Sure You Pay On Time
When you obtain the bad credit equipment financing it’s essential to make on time payments. Also, ensure that the lender reports to credit agencies so that your on-time payments can help to boost your credit score. By doing so, the next time you need to finance equipment, take out a business loan or line of credit, or otherwise gain access to funding, you will have a smoother road to approval and the benefit of a lower interest rate.
Closing Thoughts
Obtaining equipment financing with bad credit is certainly possible with the help of a broker like Llama Loan.
This can be a great avenue for businesses with little capital or assets to finance equipment purchases thanks to its self-collateralizing nature.
As with any form of financing, it’s critical to understand the cost of your financing and have a plan in place to make payments on time an in full.