You could have a competitive advantage if you’re in the construction industry and have high-quality equipment readily available to complete jobs. However, acquiring the right equipment could strain your company’s finances and lead to serious cash flow issues.
The price tag of the equipment you need can stand as a significant hurdle between you and your organization’s full potential. Fortunately, you can turn to construction equipment financing to secure the assets you need to land lucrative contracts and grow your firm without compromising its financial health.
Read on to learn more about construction equipment financing, key benefits, drawbacks, and, most importantly, how to find the perfect loan for your construction business.
How Construction Equipment Financing Works
As the name implies, construction equipment financing refers to loan products used for securing used or new equipment.
Loan amounts range from $10,000 to well over $5 million, and you’ll typically have between 1 and 5 years to repay what you borrow. In most cases, the loan amount will be the cost of the equipment you’re seeking to purchase, and you can use the equipment itself as collateral to secure the financing. If you default on your payments, the lender can seize the asset to recoup their losses.
Your specific interest rate will depend on a variety of factors, including the amount you want to borrow, your creditworthiness, how long you’ve been in business, and the lender you’re dealing with. The most competitive rates are reserved for business owners who can boast strong financials and credit scores, but you can still secure the funds you need without these qualifications. Additionally, some lenders offer discounted rates to customers who make a down payment at the start of their heavy equipment loan, which can lower your interest rate further.
What You Can Use Construction Equipment Financing For
Construction equipment financing can be used to secure any type of construction equipment, but it’s more commonly used to acquire the following pieces of equipment:
- Backhoe
- Bobcat
- Bulldozer
- Dragline excavator
- Excavator
- Grader
- Loader
- Paver
- Tower crane
- Trailer
- Trencher
- Truck
- Wheel tractor scraper
How to Qualify for Equipment Financing
The qualification criteria for equipment financing varies by lender, but most evaluate your company’s cash flow, annual earnings, credit rating, and the amount of time you’ve been in business.
You could be eligible if you meet these general guidelines:
- Been in business for at least one year
- Earn at least $120,000 in annual revenue
- Have a personal credit score of 650 or higher
If you don’t quite meet these guidelines, you could still be in luck. Some lenders will approve you for equipment financing if you’ve been in business for some time and have a credit score of 620 or higher. Others don’t have a minimum credit score requirement if you meet a certain income threshold and have at least six months of business experience, so it’s best to shop around before making a final decision.
Keep in mind that the lender you select could have more or less stringent thresholds for credit approval to determine if you qualify for funding. Ultimately, lenders want to be reassured that your company has the means to repay what you borrow on time.
If you’re having trouble reaching approval for construction equipment financing, it’s worthwhile to consider proactively strengthening your credit score. Start by focusing on paying down your revolving debt balance to give your credit utilization rate – getting this percentage to 30 percent or lower is ideal. You should also pay off any past-due accounts to avoid adverse credit reporting and ensure that you’re making timely payments on all outstanding debt obligations whenever possible.
Equipment Leasing vs. Equipment Financing
Both equipment financing and equipment leasing allow you to afford the assets you need without paying out-of-pocket, but each option has unique characteristics that set them apart. With equipment leasing, you agree to make consistent payments over a set period, and at the end of the term, you decide whether to purchase the equipment outright or return it to the lender. This decision will be different depending on your specific circumstances/business needs.
Equipment financing is the same sort of process, but you get to keep the asset at the end of the term. Think of it this way: You’re paying to use the asset through a lease, whereas you’re paying to own the asset through financing.
Consider the benefits and drawbacks of equipment leasing and financing to determine which option is right for you.
Equipment Leasing Pros and Cons
Pros:
- Less stringent eligibility requirements
- Fixed monthly payment for a set period (i.e., 2 to 5 years)
Cons:
- Equipment reverts to the lender at the end of the agreement unless you enter into a new lease agreement or purchase it
Equipment Financing Pros and Cons
Pros:
- More affordable monthly payment
- Equipment is yours to keep when the loan is paid off
Cons:
- Some construction equipment loans have variable interest rates with monthly payments that increase over time
- Equipment could be outdated or need costly repairs over time, which isn’t covered by your financing
Equipment Financing vs. Equipment Leasing: Which is Better for You?
It would depend on several factors, including the type of equipment, the amount of time you plan to use it, how much it’ll cost to maintain, and the resale value. For example, a lease is ideal if the equipment could become obsolete in the near future or your company is crunched for cash. But, if the equipment will be in use for some time and you’re looking to sell it at some point, equipment financing could be the better option.
Construction Equipment Financing FAQs
Below are some frequently asked questions about equipment financing:
Generally, you’ll need at least one year of experience in business, a 650 credit score, and annual earnings of 120,000 or more. However, you could be eligible for a loan with a credit score as low as 620 if you have been in business for some time.
In most cases, it’s cheaper to purchase construction equipment. But opting for a heavy equipment lease could be easier to qualify vs. getting financing.
If you decide to finance your equipment purchase, keep the loan terms in mind. Heavy equipment financing with a fixed interest rate means you’ll get a predictable monthly payment. A variable rate could make your monthly payment fluctuate. You will want to decide if increased payments would create any cash flow issues for your company’s finances and be prepared for the added expense.
On average, the interest rate on equipment leases is 6 to 15 percent. However, several factors play a role in your interest rate, and a lower credit score means you’ll likely get a higher interest rate.
