How To Finance Heavy Equipment
If your business relies on heavy equipment, you know how challenging it is to buy these kinds of assets outright. The cost of new (or even used) heavy equipment can run into the hundreds of thousands of dollars. And, even if you did have that kind of liquidity, it’s not always fiscally wise to outlay cash that might be needed elsewhere.
Financing heavy equipment purchases can give your business additional opportunities for investment, help you build savings for downturns and improve cash flow. This is why most savvy business owners finance heavy equipment instead of buying it outright. But if you’re new to heavy equipment financing, you probably have some questions about how it all works.
What’s the Difference Between Heavy Equipment Financing and Equipment Financing?
It’s important to know that there are major differences between financing regular equipment and financing heavy equipment. Regular equipment financing is more suitable to typical businesses that need things like restaurant equipment, large format printers, office furniture, computer hardware, business vehicles and things like that.
On the other hand, heavy equipment financing is suitable for contractors and construction companies that need things like bulldozers, cement mixers, cranes, mulchers, forklifts and things along those lines. If you seek heavy equipment financing from a place that only underwrites regular equipment financing, you could find that your application is denied, which is why it’s so important to understand the difference.
Knowing When to Get Heavy Equipment Financing
As with any major purchase, business owners need to make serious decisions about when to get financing, when to buy outright and when to forego a purchase until a future date. Making the right decision will impact the security of the business, and it should not be taken lightly. Here are some questions to ask yourself when considering whether to get heavy equipment financing:
- Can I get financing at a reasonable interest rate?
- What will be my return on investment on a financed purchase?
- Does my business need this heavy equipment to do existing jobs?
- How many years would I have to wait to buy this heavy equipment outright?
- Will my business be able to grow faster if I finance heavy equipment?
Of course, every situation will be different. In order to make a choice about when to get heavy equipment financing, you may probably to consult with your accountant or bookkeeper.
How Does a Heavy Equipment Loan Work?
With a heavy equipment loan, you can put a down payment toward the purchase and then make regular monthly payments according to the terms of the financing deal. In some cases, you may not even have to put the down payment on the heavy equipment. Of course, this depends on the business’s credit history, the cost of the equipment, and the financing company that you use. Every situation will be a little bit different.
If you are planning to stay in business for the foreseeable future, heavy equipment financing usually makes better sense than a heavy equipment lease. However, if you are a new company and you’re not sure that you’re going to need the heavy equipment for the long term, a heavy equipment lease should be considered.
How To Qualify For Heavy Equipment Financing
It’s easier than you may think to qualify for heavy equipment financing. The reason is that the heavy equipment is its own collateral. If you fail to make timely payments according to your contract, the lender can simply repossess the heavy equipment. In addition, the amount of money that you borrow for the heavy equipment is in line with the price of the equipment. In other words, you’re not borrowing money without a specific purpose, you’re simply financing a specific purchase.
It is true that your business credit score will still be taken into consideration. But if you have been in business for at least 12 months, have decent cash flow, and can show that you are a responsible borrower, there’s no reason to think that you won’t qualify for heavy equipment financing. As with any large financing decision, it behooves you to compare offers from at least three lenders.
Do Banks Offer Heavy Equipment Financing?
When it’s time to approach lenders, you should make sure that the lender is willing to underwrite heavy equipment purchases. Some banks will offer heavy equipment financing while others may not. You may find a more receptive loan officer through your local credit union than from a corporate bank, but again it depends on the lender. You should shop around to see what kind of terms that you can get. You may want to go for a lower interest rate and longer terms, or you may want to get heavy equipment financing that you can pay off early so that you own the equipment faster.
Remember, even if you have less than perfect credit, you may be able to finance your heavy equipment purchases. If you do find that you’re having difficulty obtaining financing, one option is to wait for a year and improve your business’s credit and then reapply. In the meantime, you could simply rent or lease the heavy equipment that you need.
How to Apply For Heavy Equipment Financing
Depending upon the lender that you choose to work with, the application for heavy equipment financing will vary. In general, however, you can expect to be asked to submit financial documentation from your business and possibly your personal finances. These will include things like bank statements, tax returns, accounts receivable reports, typical client contracts, and more. The length of time that you will have to wait for a response will also vary, but it will likely take at least 30 days from a traditional bank or credit union.
However, there are online lenders that offer heavy equipment financing where you may be able to get an answer in weeks or even hours. A lot of it depends on your business’s credit score, how organized your financial records are, and of course, what kind of heavy equipment financing you are applying for.
What Are Typical Terms for Heavy Equipment Financing?
Terms will vary for heavy equipment financing depending on the lender. However, usually you will not need to put up any kind of additional collateral for the loan. The equipment acts as its own collateral. The only time that you may be asked to put up additional collateral in some form is if you have a particularly bad credit situation or if your business is struggling and doesn’t have much in accounts receivable.
In that case, you may need to put a larger down payment on the heavy equipment. If you are asked to do that, then you may be able to negotiate a lower down payment in return for a higher interest rate. Talk to your lender for details.
What is a Heavy Equipment Lease?
There is one more option to consider if you decide not to purchase needed heavy equipment outright, and that is a heavy equipment lease. If you decide to go for a heavy equipment lease, one of the benefits is that you don’t have to put any money down. This is great if you are currently cash poor or need to save your liquid assets for payroll or some other needs. With heavy equipment leasing, all you need to do is to pay monthly to cover your heavy equipment rent, so to speak.
When the lease terminates, you will have the option of returning the heavy equipment, renewing your lease or purchasing the used equipment at market prices. Of course, the downside of leasing heavy equipment is that you never own the equipment. Another big downside is that you probably cannot depreciate the equipment on your business taxes.
Interest Rates and Market Conditions
Just like if you were applying for a house mortgage, the interest rates for your heavy equipment financing will depend upon the current market conditions, whether or not you are submitting a down payment, what condition your credit is in, your business’s cash flow, the amount of years that your business has been in existence, etc. Interestingly, you may be able to get a better interest rate on heavy equipment that is more expensive versus heavy equipment that costs less. Interest rates can vary between 8% and 30%, and, again, it depends on the lender and many other variables.
As for the term length for the heavy equipment financing, that has a lot to do with the expected life of whatever equipment you are purchasing. For example, a bulldozer will have an expected life up about 10,000 hours before it will need extensive repair. Whereas something like a crane will have a different life expectancy. So the term length of your heavy equipment financing will depend on what kind of heavy equipment that you intend to purchase.
How To Finance Heavy Equipment – It’s Easier Than You Think
As you can see, there is no reason why your business should be without the heavy equipment that it needs. Heavy equipment financing is both readily available and relatively easy to qualify for. Consult your accountant or bookkeeper to help you decide what works for you and your business. Most business owners will agree that there are certain pieces of equipment that are necessary to ensure that your business is able to satisfy clients and grow as a company. Get started today by choosing the heavy equipment that your business needs to succeed!