How to Secure Construction Equipment Financing for Your Firm
For small construction businesses without large cash reserves, this presents a challenge. Even minor construction projects can require expensive equipment. So, how do you finance construction equipment that costs tens of thousands of dollars?
Because there are multiple options, there’s no simple answer to this question. Many small business owners in the construction industry successfully use a mix of construction equipment loans and leases. Others might purchase some equipment and lease other tools, depending on their needs.
The key is determining the ideal strategy based on your timeline, financial health, and business goals. To help you do that, this post will review each tool in your construction equipment financing toolkit. Then, we’ll review the steps typically involved in obtaining construction equipment leasing and financing.
Construction Equipment Financing: Loans, Leases, and Rentals
It’s important to realize that you have options when it comes to construction equipment financing. Generally speaking, there are three additional working capital options that you can mix and match:
1. Use a Business Loan to Purchase Equipment
Construction equipment loans are designed specifically for financing—you guessed it—construction equipment.
With these kinds of loans, you borrow money from a financing company to purchase the equipment. After your final payment, you officially own the equipment. Typically, assuming all else is equal, heavy equipment loans and other types of equipment loans are easier to qualify for because the equipment is used as collateral.
Alternatively, you can use funds from a term loan to cover the cost of your construction equipment. However, if you do this, you should double-check the loan’s restrictions on your use of funds.
2. Lease Construction Equipment
Construction equipment leases are a popular way to finance construction equipment because they reduce your upfront cost.
Unlike a construction loan for equipment, leases don’t require a large upfront down payment. Instead, you make regular payments on the equipment for the duration of the lease period. Typically, they require monthly payments, but will depend on your lease agreement.
At the end of your lease, you return the equipment to the leasing company. Or, depending on the lease, you may have an option to renew the lease, purchase the equipment, or upgrade the equipment on a new lease.
3. Rent Construction Equipment
If you only need certain equipment for a relatively short time (i.e. less than one year), renting is a viable option. Rentals work just like leases; the main difference is that rentals cover a shorter period of time than a lease.
How to Obtain Construction Equipment Financing
Application Process and Qualification: Construction Equipment Loans
The application process for construction equipment loans varies based on where you apply. Traditional banks require the most paperwork, including:
- Business plans
- Tax documents
- Financial statements
- Credit reports
You’ll also be asked to fill out a business loan application. Once completed, you can typically expect a decision within 90 days.
Essentially, you’ll go through the same process you would for a general commercial loan. The difference is that you’ll need to provide documentation about the project and the equipment you plan to purchase.
This is because, with a construction equipment loan, the lender uses the equipment as your collateral. Therefore, they need to do their own evaluation of the equipment’s value.
It’s also important to note that with any type of construction loan or heavy equipment financing, the funds must be used to fund equipment purchases. You won’t be allowed to use the loan amount for other costs, such as inventory, real estate, or payroll.
Application Process and Qualification: Construction Equipment Leases
The good news with equipment leases is that they typically have less stringent eligibility criteria than loans. This is because, with a lease, the leasing company still owns the equipment. Therefore, they’re taking on a much smaller risk than a business loan lender is.
That said, even though the criteria are less stringent, the lease application process looks just like it does for loans. Also, your credit score, revenue, and time in business will still influence whether you’re approved or not.
5 Steps to Secure Construction Equipment Financing
- Source one or more companies that offer construction equipment loans or leases.
- Gather and consolidate required paperwork such as credit reports, bank statements, tax returns, income statements, balance sheets, etc.
- Submit application with complete and accurate information; errors will delay (or derail) the process.
- Wait for a response from the business financing lender.
- If approved, review the loan or lease offer carefully and sign to begin the closing process.
Construction Equipment Financing: Is it Right for You?
Beware of anyone recommending specific equipment financing who doesn’t intimately understand your business. The reality is, the economics of leasing, taking out a loan, or paying cash depends on (among many other things):
- Your business model
- Market demand
- The cost of equipment in your location
- What kind of equipment you need
- Your typical project length
Therefore, to determine what the best financing option is, you should compare the total cost of ownership and leasing. To do this evaluation, you’ll need to consider:
- Fuel costs
- Maintenance and repair costs
- Loan or lease payments and fees
- Replacement cost
- Operator hours and cost
- Spare and replacement parts
You’ll also need to analyze how and when you’ll pay for these costs and consider how that might affect your cash flow. Once you’ve made these calculations, you can decide what type of construction equipment financing is right for you.
For more resources on this topic, check out the posts below:
- Construction Executive: What Contractors Don’t Know About Equipment Leases Could Cost Them a Fortune
- Fora Financial: The Ultimate Guide to Equipment Loans
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.