Business Loans

Equipment Financing with Bad Credit

Nov 02, 2022 • 7 min read
equipment leasing vs. equipment financing
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      If you don’t have the best credit, but need to buy equipment for your business, rest assured that there are options at your disposal. While you might have to do some research and take some extra steps to get approved, you can lock in an equipment loan with a less-than-perfect credit score. Here’s everything you need to know about securing equipment financing with bad credit.

      What is Equipment Financing?

      First, let’s go over what equipment financing is and how it works. While equipment loans vary from lender to lender, most of them are similar. Equipment financing is used specifically to purchase equipment which ends up being collateral for the loan. To take one out, you’ll make a down payment. Then, the lender will lend you the remaining amount, which you’ll repay with interest over an agreed upon term. 

      Once you pay off your equipment loan, you’ll own the equipment outright. Equipment financing can come in handy if you don’t have the cash reserves to pay for computers, telephone systems, tractors, heavy-duty machinery, and anything else you need up front. 

      In many cases, lenders will use the equipment as collateral. If you fail to make your payments, they’ll take possession of it. Some lenders also require a personal guarantee, which states that you’ll be personally responsible for the loan if your business defaults.

      How Bad Credit Affects Equipment Financing

      Your credit tells lenders how likely you are to repay what you borrow. If you have bad credit, they’ll view you as a risky borrower and may be more hesitant to lend to you. The good news is, there are many lenders who have lenient requirements and serve borrowers with bad credit. 

      These lenders often consider other factors like your annual revenue, profitability, cash flow, and outstanding debt when deciding whether to approve you for an equipment loan. Keep in mind, however, that if you have a bad credit history you might have to settle for a higher interest rate or make a larger down payment than a business owner with good or excellent credit.

      Benefits of Bad Credit Equipment Financing

      While you may not qualify for the lowest rates and most favorable terms when you apply for a bad credit equipment loan, there are several advantages of this type of product, including: 

      • Easy Application: In most cases, you can apply for bad credit equipment financing online, from the comfort of your own home or office. The process shouldn’t take more than a few minutes.
      • Equipment Acts as Collateral: If you move forward with equipment financing, the equipment itself will serve as collateral. In some cases the lender may require all business assets be included as collateral.
      • Flexibility: Most lenders will let you buy just about any type of equipment your business depends on to serve your customers. You may use an equipment loan for basic office equipment like computers and fax machines or more specialized equipment, such as bulldozers and excavators. 

      Multiple Repayment Options: Lenders who specialize in bad credit equipment financing often offer a number of repayment terms. You can choose from a shorter-term loan that will save you in interest or a longer-term loan that will lower your monthly payments.

      How to Increase Your Chances of Approval

      If you have bad credit but need to borrow money to fund the cost of your business equipment, there are certain strategies that will boost your likelihood of locking in construction and heavy equipment financing, restaurant equipment financing, and other types of business equipment financing. Here are some ideas to consider.

      Apply with Online Lenders

      Compared to traditional lenders with brick-and-mortar locations, online lenders are usually more flexible. You’ll find that they are often open to lending to borrowers with less-than-perfect credit scores. Do your research and find several online lenders who specialize in bad credit equipment financing. 

      Consider Equipment Leasing

      It’s important to understand equipment financing vs. equipment leasing. By doing so, you can decide whether equipment leasing makes more sense for your unique needs. With an equipment loan, you make a down payment and finance the rest of the equipment cost. 

      An equipment lease, on the other hand, lets you rent and use the equipment for a specific period of time. While most businesses return the equipment at the end of the lease, some decide to buy it at fair market value or explore other options outlined in their agreement. 

      Offer Additional Collateral

      In a typical equipment loan, the equipment itself serves as collateral. Since the lender can seize it if you default, they take on less risk. If you have bad credit, you might want to offer additional collateral, like your commercial vehicle or inventory, to help secure the loan and reduce risk for the lender. Just make sure you feel confident that you’ll be able to repay what you borrow or you might lose a valuable asset.

      Increase Your Down Payment

      The larger your down payment, the smaller loan you’ll need to cover the cost of your equipment. If possible, save up for a hefty down payment so that lenders are more open to lending to you with bad credit. Not only will a larger down payment position you as a more attractive borrower, but it can also save you hundreds or even thousands in interest fees and lower your overall cost of borrowing. 

      Perfect Your Business Plan

      Your business plan is an important document that shows lenders who you are and what you plan to do with the funds. Take the time to look over and improve your business plan so that it accurately reflects your business acumen and clearly highlights how an equipment purchase will help your business. 

      Apply with a Cosigner

      A cosigner is someone with strong credit, a stable income, and significant assets. If you apply for an equipment loan with a cosigner, lenders will consider their financial situation in addition to yours. This can increase your chances of approval and potentially lead to lower rates and better terms. However, the downside of this strategy is that, if you don’t make your payments, the cosigner will be responsible for them.

      Equipment Loans for Bad Credit Are Available

      Don’t let bad credit prevent you from locking in the equipment loans you need. With a bit of creativity and patience, you can qualify for equipment financing with bad credit. As long as you choose a lender who reports on-time payments, an equipment loan can also give you the chance to improve your credit. Best of luck in your search for bad credit equipment financing.

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      The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. Any content provided by our bloggers or authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything. The information provided in this post is not intended to constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.
      About the author
      Anna Baluch

      Anna Baluch is a freelance personal finance writer from Cleveland, Ohio. You can find her work on sites like The Balance, Freedom Debt Relief, LendingTree and RateGenius. Anna has an MBA in marketing from Roosevelt University.

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