If your small business needs new equipment, chances are good that you want or need to finance the purchases rather than paying upfront. You may not have the funds available; even if you do, you likely need them for your day-to-day operations. And perhaps, at the moment, your credit is poor. So what’s the best option for finding bad credit equipment financing to buy what you need?
Even with poor credit, approach the bank you already work with to ask for their rate and terms. This move will give you a good understanding of what you are up against, and you can also find out what the options will look like later when you improve your credit. In fact, one good thing about going through the experience of bad credit equipment financing is that even if you have to pay higher interest, you can use the opportunity to improve your credit standing for future needs.
Aside from your business bank, look at credit unions and online lenders. Each one will have different lending requirements. A loan broker like Llama Loan can show you multiple options and may alert you to possibilities you would not otherwise be aware of. Also, depending on the equipment you need, consider dealer financing.
While your personal and business credit status is crucial, lenders will also want to know about the kind of business you operate. Therefore, you should be prepared with a business plan, financial statements, and an analysis of the new equipment’s positive effect on your operations.
For example, if you run an embroidery business, you may have outdated sewing machines that slow down your ability to complete jobs quickly. If you invest in a newer, computer-aided machine, you might improve your efficiency by 100 percent or more. Complete an analysis of how much more work you could complete using the targeted equipment. It might also be helpful if you could demonstrate that the demand exists, perhaps by showing requests for orders that you could not fulfill.
Rates on equipment financing have a tremendous range—recently between 4% and 30%. Bad credit equipment financing won’t be available at the lower rate, but how high it goes depends partly on how bad the credit score and other factors are. It’s a huge difference, and the high and low ends of that spectrum will be significant in determining your payment. 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.
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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.
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, add a down payment, and you may get a more favorable rate from a lender.
Keep in mind that collateral doesn’t solve all the questions a lender has regarding your bad credit equipment financing. For example, the lender prefers not to have 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.
If you are having trouble getting 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.
When you obtain the bad credit equipment financing you need, be careful to pay on time. Also, ensure that the lender reports to credit agencies. That way, the on-time payments you make can do their job of starting to improve your credit standing. If you do that, 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.