How to Get Equipment Financing with Bad Credit
Many business owners turn to equipment leasing when they need computers, machines, or vehicles, to name a few examples. You could also consider looking for an equipment loan from an alternative lender. Many of these lenders have less stringent credit requirements than traditional options, like banks.
Before you apply for equipment financing, it’s important to carefully evaluate your business to understand your needs. To help, we’ll explain the basics of equipment financing!
What is Equipment Financing?
Equipment financing can provide you with the best of both worlds: you maintain your cash reserves and get the items you need to run your business. Usually, equipment financing comes in the form of a loan or lease.
With an equipment loan, the terms may vary, but these loans are no different than a traditional loan. First, you’ll make a down payment on the equipment and borrow the rest. Then, during an agreed-upon term, you’ll repay the balance with interest. At the end, you’ll completely own the equipment.
Sometimes, lenders will treat the equipment as collateral, and take possession of it if you default. Others may require a personal guarantee. Ultimately, it depends on the lender, so it’s important to understand your lender’s requirements before applying.
What is Equipment Leasing?
Leasing equipment is another option for business owners, especially those with bad credit. When you lease equipment, you’re not required to make a down payment. Instead, you’ll make a payment each month for an agreed-upon term. At the end of the lease, you may have the option to purchase the equipment.
Equipment leases work well for business owners with bad credit because it requires less risk for the lessor, since they still own the equipment. Of course, they may still take your credit score into account, but it won’t hold as much weight as it would if you were pursuing a loan.
For cash-strapped business owners with bad credit, an equipment lease might sound like the ideal option. Still, you should understand that equipment leasing will generally cost you more than purchasing long-term.
If you can’t get an equipment loan and the survival of your business depends on upgrading, replacing, or purchasing new equipment, an equipment lease could be your only option. In the long run, that lease may be less expensive than running your business without the required equipment.
How Does Bad Credit Affect Equipment Financing?
It doesn’t help.
Like almost any kind of financing, bad credit means you’ll either pay higher interest rates, make larger down payments, or be forced to put up valuable collateral. The easiest way to determine how bad credit affects equipment financing is to think of it from the lender’s perspective.
Bad credit means, in the lender’s eyes, that you’re less likely and less able to pay them back, which puts them at risk. Since they’re taking more risk by lending to someone with bad credit, they want to ensure that risk is worth taking. Therefore, when that lender presents you with an offer, they’ll balance their risk by either increasing the price of the loan or reducing some of their risk, or a combination of the two. To increase the price, they’ll likely charge more upfront fees or a higher rate, and to reduce their risk they could require you to make a larger down payment or put up collateral.
With no cash and bad credit, you can still get the gear you need to run your business. To do this, be diligent in your research, and understand what you’re agreeing to before you accept an offer. Ultimately, even if you’re in dire need, don’t rush into a decision without understanding how the loan or lease will fit your business needs.
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.