Equipment Loans for Bad Credit Borrowers | SMB Compass
Dane Panes | January 4, 2022
- Equipment financing is a business financing option designed to help small businesses get the essential equipment they need for their operations.
- It is possible to get approved for equipment loans with bad credit. However, borrowers must expect to receive less flexible financing terms as this is the lender’s way of mitigating the risk they’re facing.
- Tips for increasing your odds of getting approved for equipment loans for bad credit include working with a lender you already know, adding a cosigner, offering a larger down payment, applying from online lenders, and pledging another collateral.
- If you don’t get approved for equipment financing, applying for a business credit card may be a viable solution.
Equipment can have a big impact on the productivity and success of many businesses. Unfortunately, the equipment can be expensive, and for companies planning to buy one, funding it out of the business’ pockets could cause a significant cash flow gap.
In this case, equipment financing can help business owners fund equipment purchases without worrying about breaking the bank. But just like other business loans, securing one that offers excellent credit terms may require you to demonstrate stable cash flow and a stellar business credit score
But what if your credit score falls between 500 to 669? Is there such thing as equipment loans for bad credit borrowers?
The short answer is yes. However, you shouldn’t set your expectations too high when it comes to the financing terms. Since lenders face a considerable risk by working with subprime or poor-credit-standing borrowers, they may charge a higher interest rate to compensate for the risk.
If you’re considering equipment loans and you have bad credit, this guide is for you. We’ll lay out everything you need to know about equipment loans for borrowers with a less than stellar credit background.
Equipment Financing Recap
Equipment financing is a funding option specifically designed to help small businesses buy much-needed equipment. With equipment financing, the equipment itself will serve as the collateral. That means, if the borrower fails to make the required monthly repayments, the lenders can seize the equipment, resell it, and use the proceeds as payment for the loan.
The repayment term for equipment financing ranges between three to five years, usually the average lifespan of the financed equipment. Lenders may require the business to make monthly repayments. Additionally, the interest rates can hover between 6% to 20% of the funding amount.
Of course, the terms the lenders offer will depend on your qualification. The better your credentials are, the better the loan terms will be. Conversely, businesses with bad credit may not be eligible for the same terms as those with stellar credit backgrounds.
How Does a Bad Credit Standing Affect Your Eligibility for Equipment Loans?
As mentioned, one of the ways to qualify for equipment financing with excellent terms is to show the lenders that you’re creditworthy. This means your credit score must be at least 670. On the other hand, if you’re applying for equipment financing with a credit score of less than what’s construed as a good credit rating, you will still be eligible for equipment loans. Still, it will be tougher to qualify for one that offers excellent terms.
For the lenders, a bad credit score means that you have a history of missed payments, or maybe even payment defaults. With that, the lenders would think that you’re less likely to pay the loan back. This essentially puts them and their business at risk. That is also the reason why banks don’t lend to small business owners with bad credit.
For the lenders that offer bad credit equipment loans, however, they compensate for the risk of working with subprime borrowers by increasing the interest rate they charge. They may also require additional collateral other than the equipment being financed. Doing this can ensure that they’re taking on a good risk, and they won’t experience a significant loss if the borrower defaults.
What are the Pros and Cons of Getting Equipment Loan with a Bad Credit?
With any type of loan, there are pros and cons to consider when securing equipment loans with bad credit. Business owners must weigh benefits from the drawbacks before moving forward with the application.
With that, here are the pros and cons of equipment financing if you’re applying with a less-than-perfect credit background.
- Prevents cash flow strain when purchasing equipment
Even if you have the cash on hand, it could be impractical to fund expensive equipment out of your pocket. By using equipment financing, you won’t add additional strain on your cash flow.By tapping into equipment financing, you can get access to a large sum of money, buy the equipment, take advantage of discounts since you’re paying cash, and repay the principal amount (plus interest) in increments throughout the repayment term you and your lender agreed to.
- Faster turnaround time
Unlike business financing from banks, equipment financing has a faster turnaround time. In fact, if you’re applying from online lenders, you can expect to hear back from them within 24 hours after applying for the financing. In most cases, funding can take about a day to a week after approval.This makes it a perfect solution for businesses looking to replace broken equipment quickly. Businesses such as restaurants and construction rely heavily on equipment to deliver exceptional services, and therefore, could benefit from this type of financing.
- It gives businesses a chance to improve credit
If you get approved for an equipment loan with bad credit, you can use it as a chance to improve your credit standing. As long as you make the required repayments on time and pay the loan balance in full, you can increase your credit score. With better credit standing, you’ll have better chances of qualifying for a more comprehensive business loan in the future.
- High interest, lower funding amount
If you’re looking for a lender that will finance 100% of the equipment’s value at a low interest rate, you may have a hard time finding one that would be willing to work with a borrower with bad credit scores. Again, since the lenders face a risk by lending to a subprime borrower, they need to ensure that they won’t take on much loss if the borrower defaults.
That said, they will be compelled to offer high-interest rates and lower funding amounts to mitigate the risk. This may make it more challenging for some companies to pay the loan back in full.
- Your credit score might take a hit
Credit checks are a standard procedure in equipment loan applications. Depending on the lender, they may do a hard credit check or a soft credit check. While a soft-credit check may affect your credit score, a hard inquiry can.
Most equipment loan applications involve a hard-credit inquiry on the borrower’s credit report. That said, if you have a poor credit score, a hard credit inquiry can cause a ding your credit score, therefore, lowering your rating further.
- Possibility of losing the equipment and other pledged collateral
Remember, your equipment financing is tied up to the equipment being financed. If you have a low credit score, the lenders may ask you to pledge another collateral for additional security.
With the financing’s high interest rate, businesses may have a tough time repaying the loan, especially if they’re experiencing significant gaps in their cash flow. If the business defaults, the lenders will take the equipment financed, plus the other assets used as additional collateral, liquidate it, and use it as repayment for the loan balance.
When to Use Equipment Financing with Bad Credit
Taking out another commercial loan is a major decision in your business. Once you apply and get approved for a loan, you’ll take on additional debt. But at the same time, you’ll also have a chance to improve your business’ cash flow and afford the purchase of essential equipment.
Before applying for equipment financing with bad credit, it is important to consider whether the benefits outweigh the costs. Here are some questions you can ask yourself if you’re considering applying for the financing:
- Do you need the equipment soon?
- Does your credit standing hinder you from qualifying for equipment loans from banks?
- Are you okay with the high cost of the financing?
- Can you afford a higher down payment?
If you answer yes to all the questions, equipment financing for bad credit might be worth considering.
Tips to Increase Your Chances of Getting Approved for Equipment Financing with Bad Credit
Applying for equipment loans with bad credit isn’t impossible, but you may have to do some legwork in order to get better chances of approval. As with other business financing options, thorough preparation will help in your application. On top of that, consider these five tips to improve your odds of approval:
- Work with a lender you already know
If you’re an established business, inquiring for equipment financing for bad credit with a lender you already work with may be a good start. Some lending institutions usually offer incentives or programs for their existing customers and may allow you to qualify for equipment financing even with a poor credit rating.
- Add a cosigner
A cosigner is essentially another person – a friend, family member, or business partner – with solid credit standing and significant assets who will serve as the guarantor for the loan. In other words, the responsibility of the repayment will fall on their shoulders in case the business cannot repay the loan balance.
Adding a cosigner significantly improves your odds of approval because somehow, the lenders are assured that if the business defaults, they can still get the repayment from the cosigner. This reduces the risk the lenders face.
Working with a cosigner not only improves your chances of approval but may also qualify you for better financing terms (i.e., lower interest rates).
- Offer a larger down payment
financing. However, lenders may require bad credit borrowers to put in a down payment higher than 20% to mitigate the risk. So, if your business has enough cash reserves, offering a larger down payment may make your application more attractive to lenders.
Plus, higher down payments also mean lower loan amounts, and therefore, balance. This makes monthly repayments easier on the pockets.
- Apply through online lenders
It will be harder to qualify for equipment financing from banks and credit unions if you have bad credit. However, all hope is not lost. Alternative lenders like online lenders may still be willing to work with subprime borrowers. Unlike traditional lenders, online lenders have more freedom to choose who they want to lend to.
Online lenders have a more streamlined application process than banks. The borrowers only need to fill up a form online through the lender’s website then submit it. They also don’t require extensive documentation. In some cases, the lenders will only ask the borrowers to grant the lenders access to the company’s accounting software to assess their eligibility.
Businesses can expect a decision from online lenders within 24 hours to a few days after applying. Once approved, funding can be as quick as one business day.
- Pledge another collateral
Typically, the equipment financed with the loan would be enough collateral to secure the financing. However, if you have a less than perfect credit score, you might need to pledge an additional asset as collateral to further secure the loan. Generally, offering commercial real estate properties or other equipment that your business owns would be ideal.
But remember that if you default on the loan, the lenders will seize the collateral. Before moving forward with the application, be sure to review your financials and assess whether you’ll be able to make the required repayments. Otherwise, you might be putting your assets at more risk by taking on a debt that you can’t afford.
Alternative Option: Business Credit Cards
Larger down payment, there are other ways to fund your equipment purchase. Business credit cards, for one, could be a viable funding source.
Business credit cards are credit lines with a set credit limit. They work a lot like personal credit cards and the only difference is, you can only use the card for business purposes – including equipment purchases.
Business owners commonly apply for a credit card because it’s one of the most accessible financing options to qualify for. Credit card providers usually consider only the personal credit score of small business owners. That said, if you personally have a good credit standing, you have better chances of qualifying for a business credit card.
However, unlike equipment financing, business credit cards come with a low funding amount. In most cases, the credit limit can be as low as $5,000. That said, if you’re financing expensive equipment like forklifts or medical diagnostic machines, this may not be the best financial solution. However, business credit cards are worth considering if you’re funding ovens, stoves, POS equipment, or computers.
With the business credit card, you only have to pay for the amount you used, plus the interest rate. In fact, other business credit card providers may offer a 0% introductory APR. This means you won’t have to pay an interest fee on the amount you used within the first year or depending on the time limit the lender sets.
Equipment Loans for Bad Credit FAQs
- What are the requirements for equipment loans for bad credit?
The requirements will vary from lender to lender. But in general, lenders will only ask for primary documents, like:
- Driver’s license for identification
- Business financials (i.e., balance sheets, profit and loss statements, etc.)
- Voided business checks
- Completed application form
- Equipment quote from the dealership
As mentioned above, if you’re applying from online lenders, you’ll only be required to sync your accounting software to their database. From there, they will evaluate your eligibility and decide on the financing terms.
- How can you apply for equipment loans for bad credit?
When applying for an equipment loan with bad credit, the first thing to do when applying for an equipment loan is to find a lender that handles subprime borrowers. Lenders usually handle application processes differently, and therefore, may have different application steps. To be sure, speak to one of the financing institution’s representatives and ask them about their equipment loan application process.
- Will my business’ financial history matter in the application?
financing providers consider the business’ financial background in determining financing terms. With that, it would help if the lenders see that your business has been soaring lately (i.e., growing revenue, extensive record of bank statements, stable cash flow, etc.). Lenders are more likely to be more forgiving with bad credit borrowers if they see that their business is doing well.
The Bottom Line: Is Equipment Loans for Bad Credit Worth It?
As with any other financing options, the decision of whether equipment loans for bad credit are worth considering or not will depend on your business situation. Bad credit borrowers are less likely to land a good deal unless they can add a cosigner or pledge high-valued collateral on top of the equipment being financed. That said, if you can afford the monthly repayments and you need the equipment as soon as possible, then it would be worth applying for equipment loans for bad credit.
But know that there are other options you can consider. Business credit cards can be an excellent solution if you’re looking to finance less expensive equipment, like computers.
When applying for equipment financing with bad credit, always do your homework first. Shop for offers from different lenders and choose the one that caters to your company’s current situation best.