Business Expansion

How to Get Equipment Financing with Bad Credit Fast

Last updated on February 12, 2020

Jacques Famy Jr

Can I get equipment financing if I have bad credit? The short answer is yes! But the how is a little more complicated. Let’s dive into the ways in which your small business can get equipment purchased financed despite the bad credit you or your business may have.

Most small to mid-size businesses run into a situation in which they need to either purchase new or upgrade old equipment to help run the process of their business. Perhaps you’re a restaurant owner who needs to purchase a brick oven because you want to offer brick oven pizza or you’re an established manufacturer with broken down forklift and need to replace some equipment fast.

So, the next step is to figure out how to get money to purchase that equipment, but you are concerned your credit is not good enough to get equipment financing with bad credit. Do not fret, because solutions do exist for business owners with bad credit.

Don’t assume you need great credit or even good credit that matter, to be able to finance equipment for your business. There are some existing, as well as new products that are available with owners with bad credit history.

There are actually a couple of different options available but let’s get back to what is equipment financing, how it works, what are the terms and qualifications, and what are my chances of getting approved.

What Is Equipment Financing?

Equipment financing is a loan or a lease to purchase a specific piece of equipment (hard physical asset) for use in your business. Examples of equipment include copiers, ovens for restaurants, and forklifts for manufacturing facilities, to name a few. The business owner is borrowing off the physical asset and using it as collateral for the loan or lease. Because of this fact, terms and costs can be stretched out further than business loans or business lines of credit, making it more payment cost-effective.

Equipment Leasing vs. Equipment Loans

Equipment leases are fixed cost financing based on a factor rate like an auto lease. You get a fixed amount you are approved for, a fixed amount you have to pay back over a fixed period of time with a fixed payment monthly until the payback is paid back in full. There are no early payback discounts or principal and interest payments.

There are two types of leases capital and operating:

  1. Fair Market Value (FMV) Lease- you make payments for a set term, and in the end, you have the option to purchase at fair market value, or you must return the equipment.
  2. $1 Buyout leases- you have a payment that is paid over a fixed term, and in the end, you can purchase the equipment for $1 and own outright.

Qualifications

  • Personal credit scores above 650
  • Equipment must be new and from a dealer, manufacturer, retailer or distributor
  • No financial statements required

Terms

  • 2 to 7 years
  • Factor rate costs range 1.10 to 1.45

Pros and Cons

  • Fast approvals (processing times the same day to 24 hrs.)
  • More lenient with personal credit
  • Costs more than equipment loans
  • No early pay discounts

Equipment Loans are based on principle and interest and have a fixed amount you are approved for but are based on a principal and interest rate over a fixed term meaning that you are only responsible for the interest on outstanding principal, so paying off early is beneficial as you are only paying principal and interest up to the payoff, therefore providing the ability to save on interest costs.

Qualifications

  • Personal credit (above 680 prefer 720 or greater)
  • Equipment must be new and from a dealer, manufacturer, retailer or distributor
  • Minimum time in business 3 years
  • Financial statements required from the business (i.e., Tax Returns, Profit & Loss, Balance Sheets)

Terms

  • 2 to 15 years
  • Interest rates from treasury or prime rate + 0% to 2.75%

Pros and Cons

  • Longer terms
  • Lower rates and principal & Interest
  • Only responsible for interest so paying off early or more frequently can save money
  • High credit and financial standards
  • Minimum 3 years in business only
  • Lower approval rates than leases

How Do You Know If You Qualify for Equipment Financing?

Equipment leases and loans are based on the owner’s credit. If your score is below 680, it is not impossible, but it will be challenging to be approved. If you have bad credit, then you are going to have to look at alternatives to finance your equipment.

What Kind of Documentation Do You Need to Apply for Equipment Financing?

Equipment Lease Documentation Requirements:

  • 1- page application filled out or online application
  • Invoice with the description of equipment to be financed

Equipment Loans Documentation Requirements:

  • 1-page Application either filled out or On-line
  • Invoice with the description of equipment to be financed
  • 6 months bank statements
  • 2 Most recent years business and personal tax returns
  • Year to date Profit & Loss and Balance Sheet, A/R, A/P

How to Make Yourself a Better Candidate for Equipment Financing with Bad Credit?

It always starts with the personal credit of the business owner. AdvancePoint Capital published an article called “How Does Business Credit Work: A Simple Guide to Establishing and Maintaining Business Credit,” which explains how to improve not only your business credit but also personal credit.

Here are some key points to improve credit:

  • Pay your bills on time going forward
  • Address bad debt and work out payment plans and resolve any outstanding issues like collections and judgments
  • Remove any errors on credit reports
  • Monitor your personal and Business Credit
  • Separate business from personal debt
  • Continue to open and maintain credit lines with vendors and suppliers
  • Do not overextend your business with too many business loans or financing

Here are some key ways to improve your financials:

  • Hire a great bookkeeper
  • Use QuickBooks or other account software and update data weekly
  • Keep great records on software so you can provide financial statements on demand in a timely fast fashion
  • Manage and Monitor your monthly business bank account by using online banking
  • Avoid Overdrafts, NSF’s or returned items in a business bank account
  • Maintain at least 10% of your monthly gross deposits in your business bank account
  • File your taxes early or on time
  • Keep great records on software so you can provide financial statements on demand in a timely fast fashion

Alternatives to Equipment Leases or Equipment Loans

Ok, you have determined you can’t get an Equipment Lease or Equipment Loan, so what do you do now? Hope is not lost! Don’t give up! There have been insurgencies of alternative business financing products now available that say Yes when equipment lease companies and banks say No!

Let’s explore 2 different ways to get equipment financing when Equipment Leasing and Equipment Loans are not an option.

Short-Term Business Loans

Short-Term Business loans have lower credit standards and allow for credit scores much lower than that of traditional equipment financing. They also don’t have the financial statement requirement you find with Equipment Loans. Let’s look at how Short-term business loans work, what are the terms and qualifications, and what are the chances of getting approved.

Qualifications

  • All types of Personal credit (above 500 Fico regularly but prefer above 600 or greater)
  • Equipment must be new and from a dealer, manufacturer, retailer or distributor
  • Minimum 6 months in business (longer time in business better the terms

Documentation to Apply

  • 1-Page Application filled out or On-line
  • 3 most recent months bank statements
  • No financial statements required

Terms

  • 6 to 18 months
  • Factor rates from 1.18 to 1.45%
  • Monthly, Bi-monthly, weekly or M-F Daily Payments

Pros and Cons

  • Higher approval rates
  • Accepts bad credit
  • Less, minimal documentation required for approval
  • Shorter terms
  • Higher costs
  • Short time in business (less than a year accepted)

Merchant Cash Advance or Business Cash Advance

Merchant Cash Advance (MCA’s) has lower credit standards and allow for credit scores much lower than that of traditional equipment financing. The MCA is also known as a Business Cash Advance (BCA). Small business owners can raise money quickly by selling a portion of their future debit card sales and credit card sales at a discount to a funder in exchange for immediate cash for the business.

The repayment method of the cash flow you receive can be determined by the lender, but it is typically automatically withdrawn as a percentage of your daily credit card and debit sales, or it is withdrawn from your daily deposits in your business bank account. This percentage is commonly referred to as a factor rate. MCA’s or BCA’s also don’t have the financial statement requirement you find with Equipment Loans. Let’s look at how Merchant Cash Advances work, what are the terms and qualifications, and what are my chances of getting approved.

Qualifications

  • All types of Personal credit (above 500 Fico regularly but prefer above 600 or greater)
  • Equipment must be new and from a dealer, manufacturer, retailer or distributor
  • Minimum 6 months in business (longer time in business better the terms

Documentation to Apply

  • 1-Page Application filled out or On-line
  • 3 most recent months bank statements
  • 3 most recent months merchant processing statements(if applicable)
  • No financial statements required

Terms

  • Estimated time to repay 6 to 18 months
  • Factor rates from 1.18% to 1.45%
  • Fixed Percentage of sales splits for Merchant Cash Advance or Monthly, Bi-monthly, weekly, or M-F Daily Payments for Business Cash Advance

Pros and Cons

  • Higher approval rates
  • Accepts bad credit
  • Short time in business (less than a year accepted)
  • Less, minimal documentation required for approval
  • Shorter time to repay
  • Higher costs
  • Short time in business (less than a year accepted)

A Final Word

Just because you have bad credit doesn’t mean you can’t finance equipment, Think outside the box.

As with all types of loans and financing, it’s important to take the time to get educated about what business financing products are available to solve your business financing needs. Stop and write out a list of what products you were approved for, what the terms are and what best works for you and your business.

There’s no doubt that you may have fewer choices if you as the business owner have bad credit, but fewer choices doesn’t mean a lack of choices. It is definitely possible to get equipment financed even if you have bad credit. What we are saying is explore those alternative options, weigh the pros and cons of what choices you have, and consider that against the value of the purchasing of the new equipment for your business in terms of future revenue.

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* All loans made by either WebBank, an FDIC-insured Utah industrial bank, or Bank of the Internet Federal Bank, an FDIC-insured federally chartered thrift located in California. In connection with the loans, the Banks' underwriting conditions and terms apply.