Getting equipment for a business is expensive, which is why many business owners use equipment leases and equipment loans to buy computers, vehicles, machines, and heavy equipment. Before you can get financing for your equipment, however, you should understand and evaluate your business. You should know what you need. Unfortunately, even if you know just what you need, it may still be challenging to secure funding for equipment with a bad credit score.
What is Equipment Financing?
Equipment financing allows you to get the equipment you need for your business without dipping into your cash reserves. Equipment financing is often provided through the form of leases and loans.
The terms for equipment loans can vary, but they are the same as traditional loans when you get to the fine details. These loans allow you to make a downpayment on the equipment and then use the loan to cover the rest of the cost. You then repay the balance of the loan – with interest – upon an agreed schedule. When the money is paid back, the equipment is yours, and you are the sole owner.
Lenders may sometimes treat the purchased equipment as collateral for the loan. They could take the equipment if you fail to pay back the loan as agreed. Some lenders require personal guarantees from you. This all comes down to the lender, so be sure you know what you are getting in for before signing anything and taking out a loan.
What is Equipment Leasing?
Equipment leasing is another option for financing equipment purchases. These plans are suitable for those with bad credit. Leasing equipment means you don’t have to make a downpayment on it. Instead, you pay a set amount of money each month as agreed with the supplier. You can purchase the equipment if you want when the lease is over.
Equipment leases are less risky than loans and so are better for those with bad credit. The lessor still owns the equipment so that they won’t have much of a loss if you fail to make the payment. Of course, lessors will still look at your credit score before leasing your equipment, but it isn’t as big a consideration as it would have otherwise been.
Equipment leasing sounds like the ideal choice for business owners without as much money. Even so, you should understand that leasing equipment generally costs more in the long-term compared to purchasing.
How Does Bad Credit Affect Equipment Financing?
Bad credit affects equipment leases and loans as it affects everything else. Banks aren’t interested in lending money to people with a bad credit rating. Even a credit score of less than 600 can cut you off from most financial products.
Given that banks don’t like to lease equipment or lend money to people with scores under 600, it can be difficult for a business owner in this position to get the equipment they need. Working capital and cash advance options are often more difficult and expensive to acquire. You may be unable to take that approach at all if you are in a hurry to get the equipment you need. Purchasing equipment in full out of pocket will also put a significant dent in your cash flow.
So, how can you secure an equipment lease or equipment loan with bad credit? Well, there are some options.
How to Secure an Equipment Lease With Bad Credit?
- Get a Cosigner
Your first option is to get a cosigner for the lease or loan. The cosigner will be someone who will add their name to the application and lease. They will become legally responsible for paying your debt if you fail to do so. The cosigner needs to be someone with a better credit score than you. Finding someone to cosign the loan is often the easiest way to secure a lease with bad credit. Just keep in mind that the cosigner is just as liable for the loan as you are. They trust you, so do what you can to prevent them from having to shoulder your debt.
- Make a Bigger Downpayment
Making a more significant downpayment is another way to save money on your lease. If you are having trouble securing a cosigner for your loan, or don’t want to risk another person’s finances, then making a larger downpayment on the lease can help push the deal through. This means that you need to put forward a significant downpayment to offset the risk, however. Alternative lenders can ask for upwards of 20% of the total cost as a downpayment before approving the loan.
- Use Collateral
Finally, there is the option of using a personal guarantee or collateral for the loan. Using collateral is often seen as a last resort for businesses. Using collateral does mean that your application is likely to be approved. You can put up property you own as collateral towards the equipment lease. If you really need the equipment – and the money to purchase it – then collateral could be the way to go.
Keep in mind there is no way to guarantee approval. Avoid companies that promise you this. If you see something like “Guaranteed approval” in marketing materials, bear in mind this is false. Please don’t fall for false claims like this as they can do further damage to your credit score instead of helping. These companies can actually lower your credit score even more by running it. Companies that make these sorts of promises often use them as lures and then change the deal on you. Do your due diligence and look for testimonials and reviews of loan providers when securing financing – especially with bad credit financing.
We here at Clear Skies Capital understand that you need equipment loans and equipment leases. We aim to make the borrowing process as easy as possible by offering a range of financial products. Get in touch today and talk to our experts to learn more and see what we can do for you. We want to help you – and your business – achieve your full potential.