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Equipment Financing With Bad Credit And How It Can Help Businesses?

Whether you’re starting a new business or have been in operation for many years, most small businesses require new equipment from time to time for a variety of reasons. A successful restaurateur may decide to renovate their kitchen or open a new location. To better serve its customers, a growing painting company may decide to purchase an additional utility van.

Whatever the case, these expenses, especially when unplanned, can be prohibitively expensive.

One of the most significant reasons is that 60% of small businesses experience cash flow issues each year.

When a business needs to buy new equipment, upgrade existing machinery, or replace old equipment, it can be difficult to find the funds.

After all, small business owners must pay operating expenses every month and must have cash on hand to pursue new opportunities. As a result, many small business owners in need of equipment seek financing from outside sources.

Looking for financing equipment with bad credit? Check out our selection of loans for people with bad credit! We’ll find the perfect financing solution for you.

What Exactly Is An Equipment Loan?

An equipment loan is a common financing option for businesses that require new equipment or vehicles but do not have the financial resources to pay cash. In most cases, the immediate returns from the newly purchased equipment can be used to cover the loan’s monthly payments. In comparison to secured loans from traditional banks, which require business owners to pledge their assets as collateral, equipment loans are a more strategic financial decision.

Is your company in need of an equipment loan?

A loan for equipment is a significant financial decision. Most business owners decide to take out an equipment loan to replace old ones, upgrade or add to their existing fleet.

A variety of factors contribute to the decision of business owners to replace the equipment they are currently using. The most common factors are deterioration and obsolescence, which frequently result in hazardous working conditions, capacity constraints, and decreased profitability.

1. Deterioration – After a long period of use, the performance of the equipment may begin to deteriorate. Deterioration can be managed through regularly scheduled maintenance, but all equipment eventually shows signs of wear and tear.

2. Obsolescence – Due to the rapid pace of technological advancements, some equipment becomes obsolete sooner than expected. Keeping up with the rapid advancement of technology can be extremely difficult for some businesses, particularly small ones.

3. Workplace hazards – As equipment deteriorates or becomes obsolete, it may cease to function properly, posing hazards to workers.

4. Reduced profitability – Old equipment may eventually perform inconsistently or simply be incapable of keeping up with newer models, resulting in defective products and an inability to meet production demand.

What Should You Look for in an Equipment Financing?

When looking for any type of small business financing vehicle, including equipment loans, there are several factors to consider:

1. The lender’s area of expertise. As previously stated, some lenders will only fund businesses in a specific industry (e.g., construction, restaurants, and so on). If you own a restaurant, you should probably avoid applying for a loan from a lender that specializes in manufacturing equipment loans.

2. The loan’s size. While some equipment loan providers will finance up to $2 million in purchases, others may only be willing to lend you $100,000. The size of the loan and the type of equipment required can influence which provider you should use.

3. Qualifications are required. Each lender has a unique set of requirements that they look for in borrowers. Some equipment loan providers, for example, may require borrowers to have credit scores of 600 or higher. Others may be willing to lend to borrowers with at least a 500 credit score. Lenders may also consider how long your company has been in operation to determine whether you qualify for an equipment loan. Finally, lenders may assess your creditworthiness based on your annual revenue. 

4. Rates of interest. Fixed interest rates on equipment loans typically range from 8% to 30%. Just remember to do your homework to avoid signing up for a loan that will end up costing you a fortune in the long run.

5. Funding speed. Many equipment loan financiers can fund small businesses in a matter of days, if not hours. Other lenders, especially those affiliated with the Small Business Administration (SBA), may take several weeks.

6. Loan conditions. How long do you intend to keep the equipment loan? Some lenders may provide 10-year loans, while others may provide loans that are expected to be repaid within a year. Look for terms that make sense in the context of your company.

It’s time to start the application process after determining which equipment loan criteria are most important to consider for your business and deciding whether an equipment loan is a right choice for you.

What are the Prerequisites for Obtaining Equipment Financing?

Not every business will be eligible for equipment financing. However, programs are available for the majority of situations. If you’ve only been in business for one day, or if you’ve had a bankruptcy within the last year, you may still be able to qualify for equipment financing. In situations like this, you may require a deposit or collateral.

If you’re still concerned about your ability to qualify for the equipment loans you require, you can improve your appeal to lenders by making the following changes:

1. Look for a cosigner.

If a cosigner with better credit agrees to cosign on your loan, lenders may be more willing to offer you equipment financing at a better rate.

2. Other assets can be used as collateral.

Do you have any additional equipment or real estate that you could use as collateral? Typically, the equipment required for the loan is used as collateral in the event of a default, but if you have poor credit, offering more collateral may be the boost you need to get the funds you require.

3. Make a substantial down payment.

If you have enough cash on hand to cover a significant portion of the total equipment cost, you’ll have a much better chance with prospective lenders as a candidate with bad credit.

4. Demonstrate your business acumen.

Of course, it’s easier said than done, but it’s worth attempting to demonstrate to the lender that your business has recently been thriving. Can you provide several months of bank statements to demonstrate rapidly increasing revenue? Lenders may be more forgiving of a poor credit score if there is evidence that the business is thriving.

How Do You Determine If You Are Eligible for Equipment Financing?

Of course, there is no tried-and-true formula for qualification, but a good indicator of whether you’ll be eligible for some kind of equipment financing is:

  • You’ve been in business for at least 11 months.

  • You should have at least a 600 credit score is a must.

  • Annual revenue of $100,000+

Even if you don’t fall into one of these categories, especially the last one, most businesses can still qualify for funding. Because of the collateralization aspect, you can probably still find equipment financing with a bad credit rating. However, how much your company qualifies for and the interest rate you’ll pay on that loan is determined by the value of the equipment, your company’s financial history, and your credit score. In fact, equipment financing companies consider what is securing the loan just as much as your company’s creditworthiness.

Lease Funders

Lease Funders specializes in providing equipment leasing programs for new (startup) businesses and businesses with credit problems.

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