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How To Get An Equipment Loan If You Have Bad Credit

how to get an equipment loan with bad credit

Applying for an equipment loan with bad credit does not have to be a lost cause.  You can still get a loan but it may just take a little bit more work.  

Getting an equipment loan as a small business with bad credit can be difficult. Unfortunately, this is all too common for many small businesses. A recent survey found that 36% of small businesses were denied some of the funding they sought because of their credit score. Unfortunately, this statistic also applies to equipment financing.

Can I get equipment financing for my business if I have bad credit?

A low credit score should not prevent you from obtaining financing to purchase much-needed new equipment for your company.

Investing in new equipment for your company might be expensive. Many business owners use equipment finance to help them deal with the immediate financial hardship of purchasing expensive equipment. Equipment financing enables you to buy equipment for your business without having to pay upfront or deplete your cash reserves.

Borrowers with bad credit can acquire equipment loans. However, it may be challenging. This blog post will discuss what you can do if you have a low credit score to put yourself in the best position to get the equipment financing you need.

What is equipment financing?

Equipment financing is a type of business loan where the proceeds are used to purchase new or used equipment. Appliances, vehicles, electronics, machinery, and heavy equipment are all examples of equipment that can be financed. 

The proceeds from equipment loans cannot be used to cover payroll, real estate, or other obligations. 

When you take out an equipment loan, you will usually be charged a fixed interest rate and have a set amount of time to pay it back. After the loan is paid, you own the equipment. An equipment loan is similar to getting a loan to buy a house or a new car.

For small business owners, taking out equipment loans is a frequent occurrence since the equipment is constantly being replaced and upgraded. Since equipment can be costly, buying it upfront or in cash is not a viable option. 

How can adverse credit affect equipment financing?

Equipment finance is often easy to obtain for small business owners with solid credit scores. But, unfortunately, for those business owners with less than ideal credit, the story is often not the same.  

To qualify for an equipment loan, a prospective lender will have a credit score requirement. If you fall short of their credit requirement, getting an equipment loan becomes difficult and expensive. After all, your credit score largely determines the amount you pay to borrow money.  

There are equipment financing companies that will work with small business owners that have bad credit. Other factors besides a credit score are considered, such as annual total sales and the length of time the company has been in operation. 

A lender may require that the equipment purchased with the proceeds of an equipment loan serve as collateral. Should the borrower default on the loan, the lender takes possession of the collateral.  

Will some lenders charge an upfront fee for an equipment loan?

Some lenders may charge an upfront fee to borrowers for equipment financing. Fortunately, such lenders are more the exception than the rule, with most lenders not charging such a fee. It is suggested that you seek out a lender that doesn’t charge you extra fees based on your credit history.

Don’t fret if you can’t find a lender. Equipment financing is still possible but with a little more work.  

Earlier, I briefly touched upon collateralizing an equipment loan whereby the lender takes possession of the equipment should the borrower default on loan. Some lenders may require a borrower with bad credit to put up additional collateral such as another asset or real estate to make the equipment loan. You should be aware that the lender has the right to confiscate both pieces of collateral with such an arrangement.  

Some lenders will require a down payment to offset some of their risks. A typical amount is a 20% down payment. Offering a down payment of over 20% may boost your chances of being approved. This, together with increased collateral, may increase your chances of getting the loan approved.

In exceptional cases, lenders may request that you provide a business plan when applying for equipment financing. This may be true for lenders who consider more than your credit score when evaluating your application. Updating and/or improving your business plan may increase the lender’s interest in your business. It may enhance your case if you can show that you have a lot of cash on hand. A lender may overlook a poor credit score if you can demonstrate that you consistently have more money coming in than going out.

As a final option, you might want to consider getting a cosigner who agrees to repay the loan if you don’t make your monthly payments. In addition to your credit score, the lender considers the credit score of the cosigner. Therefore, having a cosigner can help you get approved and get better loan terms, such as a reduced interest rate.  Note, that if you default on your loan, your cosigner’s credit will be impacted.

What are the advantages and disadvantages of financing equipment with an acceptable credit score?

There are advantages and disadvantages to any loan. Only you can decide whether the benefits of the loan outweigh the disadvantages of taking it on.

Advantages of equipment financing for people with bad credit

  • Maintains your cash flow – Even if you can afford to buy the equipment outright, financing it over time can help you keep your financial flow in check. The last thing you want is to run out of cash because you spent a lot of money upgrading your equipment.
  • A quick turn-around – If you need money to replace equipment broken down, you must act quickly. The longer you go without it, the more damage your company is likely to suffer. Don’t be unrealistically preoccupied with the need to save money when financing the acquisition of an expensive piece of equipment. Get the new equipment if you can get the financing on reasonable terms with little impact on your business and cash flow.
  • Improves your credit score. If you finance equipment and pay your bills on time, you can create a good credit history, which you won’t get if you pay cash.

The disadvantages of equipment financing

  • Your credit score may suffer – Equipment financing can help you improve your credit score, but it can also hurt if you miss payments or default on a loan, making borrowing money more expensive in the future.
  • It has a negative financial impact – You and your business will suffer if you finance pricey equipment and can’t make the monthly payments. Don’t borrow the money you can’t afford to repay.
  • There’s a chance you’ll lose more than just your equipment – Borrowers with imperfect credit may be forced to furnish additional collateral over the equipment’s worth. If that’s the case, you’ll lose both the equipment and the collateral you put up if you default on your loan.

Concluding thoughts

Securing equipment financing for your small business can be challenging if you have bad credit.  However, it doesn’t have to be a lost cause.  There are things you can do to get the equipment funding you need for your business.

This blog post describes what may happen when applying for equipment financing when you have bad credit and what you can do to increase your chances of getting the funding needed.  

Zip Capital Group provides equipment financing to small businesses of all sizes.  Contact us or call (800) 795-3919 to discuss your equipment financing needs today.

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