Many business owners turn to equipment leasing when they need computers, machines, vehicles, or heavy equipment, 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 secure financing for business equipment, it’s important to carefully evaluate your business to understand your needs. To start, we’ll help you decide whether equipment financing or leasing is right for your company!
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 traditional loans. 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. In the end, your business will completely own the equipment. Sometimes, business lenders will treat the equipment as collateral and take possession of it if you default. however, other lenders may require a personal guarantee. Ultimately, it depends on the equipment financing company, so it’s important to understand their requirements before applying.
What is Equipment Leasing?Equipment lease financing 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 poor credit because it requires less risk for the lessor, since they still own the piece of equipment. Of course, they may still take your business or personal credit score into account, but it won’t hold as much weight as it would if you were pursuing a business 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 funding 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?Essentially, having a bad credit score isn't going to help you qualify for most types of equipment financing loans. Like almost any kind of financing, having bad credit history means you’ll find yourself in the following situations:
- Pay higher interest rates
- Make larger down payments
- Be forced to put up valuable collateral