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Heavy equipment financing helps businesses purchase or lease machinery and installations without having to pay in full upfront. In other words, it can help you expand your business with new infrastructure while spreading out the costs over time.

Financing for equipment can be set up in various ways, depending on whether you prefer to own the equipment at the end of your payment period or return it after leasing. Learn how heavy machinery financing works and how to choose the best option for your business.

What Is Heavy Equipment Financing?

Heavy equipment financing is a type of business loan that allows you to pay for expensive machinery in installments. The advantage is that you can reserve your working capital for other costs while also acquiring equipment or machines that your business otherwise couldn’t access. You may need to make a down payment, and it’s common practice to secure the loan using the machinery itself as collateral. Both of these moves can help lower your loan payments.

Recommended: How to Apply for a First-Time Business Loan

Types of Heavy Equipment Financing

If your business wants to finance a heavy equipment purchase, there are several options to choose from.

Traditional Equipment Loans

A traditional equipment loan is a type of small business loan that is used solely for a hard asset and its associated costs. (Construction equipment financing is one example.) Lenders often finance between 80% and 100% of the purchase price. If the loan doesn’t cover the full price, the business will likely need to make up the difference in the form of a down payment.

The lender charges interest on the loan, and the business pays the balance down over a predetermined period of time. A heavy machinery financing term can last from months to years, depending in part on the amount of the loan.

Leasing Options

Choosing to lease vs. purchase equipment for your business can sometimes be a cheaper option. You may not need a down payment and the term is usually shorter. Typically you’d return the equipment at the end of the lease. This arrangement can be beneficial if your business only needs the equipment for a set period of time, or if you prefer to upgrade to newer models every few years.

Alternatively, with a capital lease (also known as a finance lease), your agreement generally offers you the option to buy the equipment at the end of the term.

If you anticipate ending your lease early, watch out for an early termination penalty in your contract. The penalty could add to the total cost.

Equipment Lines of Credit

A business line of credit can be used for equipment instead of a loan. The funds can be used for purchasing machinery as well as repair and maintenance expenses. Unlike an equipment loan, which pays out a lump sum, a line of credit lets you draw funds as needed, on your own schedule, up to your credit limit.

Sale-Leaseback Arrangements

Rather than take out a small business loan, you could inject capital into your business using a sale-leaseback. With this approach, you would sell equipment you already own to a lender, then rent it back from them. So you still get to use the equipment, and you also get money upfront before you start making your lease payments to the new owner.

Qualification Process

Your business will need to meet a few qualifications if you want to finance heavy equipment with a loan or lease.

Credit Requirements

Lenders consider your business’s credit history as a big part of eligibility for equipment financing. In addition to looking at your credit score, they’ll also check for a history of bankruptcies, late payments, and foreclosures. It’s possible to get bad credit equipment financing, but you may need to increase your down payment or offer additional collateral to qualify.

Business History

Your business history is used to assess your company’s capacity to pay future lease or loan payments. A lender will look at revenue, cash flow, and other debt obligations to calculate your business’s debt-to-income ratio. If it’s too high, a lender may reject your application because adding new financing debt may be deemed too risky.

The length of time you’ve been in business is also an important factor. Even if you use the equipment as collateral, a new business with little revenue history may not qualify.

Recommended: Startup Business Loans

Industry Considerations

It’s not just your business that gets evaluated for a heavy equipment application — it’s also your industry. Lenders consider factors like current economic and industry trends, as well as potential legislation that could affect your sector as a whole.

Cost Analysis

Before you start submitting applications for heavy equipment financing, think about all of the potential costs involved so you can compare your options with confidence.

Interest Rates

Equipment financing often comes with lower interest rates than other options because the equipment itself is an asset you can use as collateral. Still, lenders all offer different rates, so it’s smart to compare a few different quotes. Rates also vary based on the type of financing, such as a term loan, line of credit, or lease.

Fee Structure

Purchasing equipment or machinery for your business may include extra costs, such as taxes, delivery, and installation. Those fees may need to be paid in cash, or they could be rolled into your financing package.

Tax Implications

There are a few tax benefits associated with equipment financing and other major purchases. Consult a tax advisor for the latest regulations and to find out how they may apply to your business.

•  Section 179 tax deduction: This IRS provision allows you to deduct the total cost of qualifying equipment, vehicles, and other purchases in the first year. For the 2024 tax year, the maximum deduction is $1.22 million.

•  Bonus depreciation: This tax benefit is being phased out after the 2026 tax year unless upcoming legislation renews it. But for now, businesses can write off a larger percentage of a major purchase’s cost in the year it’s placed in service; the traditional depreciation method kicks in for the succeeding years.

•  Business interest deduction: If you pay interest on any kind of business financing, the interest can be deducted (up to the allowable limit).

How To Apply for Heavy Equipment Financing

While the exact application process varies based on the type of financing you choose, you’ll usually need to submit the following information:

•  Business license and financial documents (such as bank statements, tax returns, and profit and loss statements)

•  Personal and business credit check

•  Equipment purchase details, including make, model, age, cost, and purpose

The Takeaway

Using new equipment or machinery to expand can take your business to a new level. But be sure to compare the costs and payment schedules of multiple financing options before making a decision. There may also be tax advantages; check with a tax professional about your situation.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What’s the minimum credit score for heavy equipment financing?

Every lender sets its own requirements for credit scores. If you have a bad credit score, consider putting together a larger down payment to help improve your chances of approval.

Should I lease or buy heavy equipment?

Whether you lease or buy heavy equipment depends on how long you plan to use the equipment. If you want to own it over the long term, buying is the better option. But if you like to upgrade to different equipment every few years, you may prefer to lease.

How long can I finance heavy equipment?

No matter how you finance heavy equipment – with a traditional equipment loan, a business line of credit, an equipment lease, or a sale-leaseback arrangement – the term of the loan or lease is a detail that you and your lender can negotiate. Bear in mind that a longer term means lower monthly payments but more interest paid over the life of the loan.

What documentation do I need for equipment financing?

Lenders usually require equipment financing documentation such as business financials and the details of the proposed machinery purchase, including information on how it will help your business grow.

Can startups qualify for heavy equipment financing?

Startups may qualify for heavy equipment financing since the equipment itself is used as collateral. However, lenders usually have their own business longevity requirements; minimums can vary from a few months to a few years.

Photo credit: iStock/ewg3D

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOSMB-Q125-002

A commercial bridge loan, also known as a business bridge loan, can offer cash flow in the short-term if you have costs to cover before other financing comes through. In other words, commercial bridge loans can save a business in a pinch, especially when it comes to purchasing real estate.

Keep reading to learn more about what a commercial bridge loan is, how they’re typically used, their pros and cons, and more.

What Is a Commercial Bridge Loan?

A commercial bridge loan is a short-term financing solution used by businesses to cover immediate funding needs while waiting for long-term financing or a property sale. These loans are commonly used for real estate purchases, renovations, business expansions, or debt refinancing.

Because of their purpose, bridge loans have shorter terms than traditional small business loans, typically up to three years. These loans are usually secured, meaning they’re backed by collateral of some type, such as inventory or real estate. Bridge loans also generally have higher interest rates compared to traditional loans.

How Do They Work?

Let’s say a business wants to purchase a vacant office building for $5 million to expand its operations. However, securing a traditional commercial mortgage would take several months, and the seller requires a quick closing.

As a solution, the business obtains a commercial bridge loan for $3.5 million, using the property as collateral. The loan has a 12-month term, 9% interest rate, and interest-only payments. During this period, the business owner refinances the property into a long-term commercial mortgage with a lower interest rate, and pays off the bridge loan.

Just like with any other type of business loan, different lenders will have different lending programs. When comparing commercial bridge loans, two aspects to consider include:

•  Speed of funding: Businesses typically seek commercial business loans because they have an urgent funding need. Check a variety of lenders to find one that can meet your timeline.

•  Incentives to prepay: This is a short-term form of funding — in other words, a temporary loan. Ask lenders if you can receive a prepayment discount or otherwise save money by paying it off even earlier.

Also, ask each lender if they offer open or closed bridge loans. Open bridge loans don’t have hard and fast repayment dates, offering more flexibility. These may come with higher interest rates and make it more difficult to get approved, though. Closed loans, on the other hand, have a set payoff date and, in return, can be easier to obtain with lower interest rates.

Types of Bridge Loans

There are several types of commercial bridge loans, each designed to meet different business needs:

1.   Real estate bridge loans: Used by investors or developers to quickly acquire, renovate, or reposition commercial properties before securing long-term financing.

2.   Business expansion bridge loans: Provides short-term funding for companies looking to expand operations, acquire new locations, or invest in growth opportunities.

3.   Debt refinancing bridge loans: Helps businesses refinance existing debt or consolidate loans while they arrange more permanent financing solutions.

4.   Construction bridge loans: Used to fund the initial phases of commercial construction projects before developers secure full construction or permanent financing.

5.   Acquisition bridge loans: Assists businesses in purchasing competitors, assets, or inventory when immediate funding is needed but long-term financing is not yet available.

Commercial Bridge Loans vs. Traditional Loans?

People typically take out a bridge loan because they need fast access to cash for a short period of time. Traditional loans usually have a longer approval process and almost always have a longer term.

Sometimes, repayment of a bridge loan resembles that of traditional loans, with a monthly payment required. Other times, the borrower would make interest-only payments until the end of the loan term, and then make one final payment to pay the loan off. And in other cases, the interest owed is taken from the loan amount at the time of closing.

As mentioned above, bridge loans also tend to be more expensive than traditional loans. Not only do they usually have higher interest rates, but bridge loans also tend to have hefty origination fees.

Recommended: What Are the Fees Associated with Business Loans?

Pros and Cons of Commercial Bridge Loans

Now, take a look at the benefits and downsides of commercial bridge loans.

Pros

•  Businesses can get cash fast for immediate needs, typically real estate.

•  To facilitate the fast need for funds, the application, underwriting, and funding processes are typically streamlined.

•  Can be used to cover day-to-day expenses while a transaction is in progress.

Cons

•  Interest rates are higher than many other loan types.

•  This is a secured loan with property serving as collateral.

•  They often have high origination fees.

Recommended: A Guide to Collateral and Business Loans

How Businesses Use Commercial Bridge Loans

Although commercial bridge lending is often used when purchasing real estate, there are other reasons that a business may look into a bridge loan.

Fix-and-Flip Project

A fix-and-flip project involves purchasing a property, fixing it up or renovating it, and selling it for a profit. This is typically done over the course of a few months. Because bridge loans are short-term financing options, they can be used to purchase and fund these types of projects. Once the home is resold, the money can be used to pay off the loan.

Delay in Customer Payment

If a business offers services to other businesses (meaning it’s a B2B company), they invoice their customers for payment. The company would then use the money paid on these invoices to cover payroll, rent, utilities, and other expenses. If customers don’t pay on time, they still need to pay their own bills — and so they could use this type of loan to bridge their cash flow issues.

Expanding Your Business

A small manufacturing firm, for example, may have an opportunity to expand their services but need to buy new equipment to do so. Perhaps they’ll go to an auction to get the best pricing, which means they’d need to have funds without knowing exactly what they’ll purchase. This would make it challenging to obtain equipment financing ahead of time. Bridge lending can offer a solution in this scenario.

Insurance Claims

When a business leverages bridge lending, they can use the money in ways they see fit. So, if there’s some sort of disaster (a fire, flood, or tornado, for example), then a business could use the funding to take care of immediate expenses while waiting for business insurance claims to be processed.

Buying Inventory

Sometimes, businesses use bridge lending services when they need to buy inventory to sell. For instance, they may need to restock their shelves after sales increased or get ready for the holiday season. The business could then pay off the loan through sales proceeds or by refinancing to another type of business loan.

Recommended: How to Refinance a Business Loan

Where to Apply for a Commercial Bridge Loan

You can get a commercial bridge loan through a bank, credit union, private lender, or online lender.

Banks and credit unions may offer lower rates than direct and online lenders, but it may take longer to get approved and the requirements may be more stringent. Direct lenders typically have less strict requirements. Also, they may offer interest-only payments for the first year or two until the final payment is due.

To find the best commercial bridge loan, you’ll want to shop around to find the best rate and terms for your situation.

Recommended: Comparing Personal Loans vs. Business Loans

Alternatives to Commercial Bridge Loans

If a commercial bridge loan is not right for you, there are other options to secure small business financing, including:

•  Small business loan: Traditional small business loans can be short or long-term, be backed with collateral or have no collateral, and can come with competitive interest rates for those with good credit scores.

•  Business line of credit: A business line of credit gives a business access to funding where interest is charged on the outstanding balance, not on the amount that’s available to use. Businesses can use the funds as needed and repay them in a revolving manner, as long as they don’t exceed the approved limit for the line of credit.

•  SBA loans: SBA loans are guaranteed by the U.S. Small Business Administration (SBA) and offered by certain lenders. Loans are available up to $5 million to cover a wide range of business needs.

•  Invoice factoring: With invoice factoring, businesses can use their unpaid customer invoices as collateral. This helps B2B companies to manage their cash flow with the factoring company, which is then responsible for collecting the outstanding amount.

•  Small business grants: Small business grants are lump sums awarded by federal, state, or local governments or by private corporations that do not need to be repaid.

The Takeaway

Commercial bridge lending can provide businesses with a fast influx of cash on a short-term basis. Business owners can leverage this funding to buy real estate, expand operations, and manage cash flow. There can be cons, though, to bridge loans, such as higher interest rates and shorter repayment terms.

If this type of lending isn’t right for you, there are other types of small business funding to consider, including SBA loans, invoice factoring, and long-term small business loans.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What is a commercial bridge loan?

A commercial bridge loan is used to secure funding while you wait for long-term funding to come through. It’s used to “bridge the gap” between the period of time it would normally take for a normal business loan to close. In most cases, commercial bridge loans are used when purchasing real estate.

What are the cons to a commercial bridge loan?

Cons to a commercial bridge loan include higher interest rates, additional and/or higher fees, and shorter repayment terms.

How is a commercial bridge loan different from a traditional loan?

A commercial bridge loan is a short-term form of funding that allows you to purchase a property while you wait to secure a traditional financing option. Traditional loans typically have longer repayment periods and lower interest rates. These loans do not close as fast as bridge loans, though.

How long do commercial bridge loans typically last?

Commercial bridge loans typically last 6 months to 3 years, depending on the lender and borrower’s needs. Most loans have 12- to 24-month terms, with some offering extensions.

What are the interest rates on commercial bridge loans?

Interest rates on commercial bridge loans typically range from 6% to 12% or higher, depending on factors like loan amount, property value, borrower creditworthiness, and market conditions. Since these loans are short-term and higher-risk, they carry higher rates than traditional financing but offer quick access to capital for businesses.

Photo credit: iStock/alvarez

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOSMB-Q125-021

Signing a personal guarantee as part of a business loan agreement makes you personally liable for the debt if the business defaults on the loan. There are some benefits to using a personal guarantee, including potentially better interest rates. But it also means you’re putting your personal assets at risk if your business experiences a downturn and can’t make its loan repayments on time.

Learn what a personal guarantee entails, what risks it involves, and what to know before you sign one for your next business loan.

Understanding Personal Guarantees

A personal guarantee is a legal obligation that an individual will be financially responsible for a business debt if the business itself can’t repay the financing. If a business owner signs a personal guarantee as part of a loan agreement, he or she must cover the debt with personal assets in the event of the business defaulting.

Typically, assets could include your checking and savings accounts, vehicles, and real estate (like your home). It’s important to know what’s included in the guarantee because it should name the assets at risk if the loan goes into default.

Despite the risks to your personal assets, you may decide that it’s worth signing a personal guarantee. It can help strengthen your application for small business financing, especially if your company has poor credit or no credit history.

Limited vs. Unlimited Personal Guarantees

There are two primary types of personal guarantees: limited and unlimited personal guarantees. It’s important to understand the differences because your responsibility varies significantly depending on which type the lender requires.

Limited guarantee: This option is usually designed when there are multiple business owners making the guarantee. Each owner is responsible for up to a certain percentage or amount of the outstanding balance if the loan goes into default. Five partners, for instance, might each have a limited guarantee of 20% of the loan balance.

Unlimited guarantee: This type of guarantee requires one principal personal guarantor who is responsible for the full amount of the small business loan. In addition to liquid assets, the creditor may also seize physical assets like cars or real estate in order to recoup a defaulted loan.

Why Lenders Require Personal Guarantees

A lender may require a personal guarantee as an extra layer of financial protection in case the business is not able or willing to repay the loan. Personal guarantees both mitigate lender risk and demonstrate borrower commitment.

Mitigate Lender Risk

Without a personal guarantee, there aren’t many ways for the lender to be reimbursed for the outstanding balance, particularly if the business doesn’t have significant assets to liquidate. Having the option of this legal recourse through an individual reduces the lender’s risk of losing money on the loan.

Some forms of financing (like heavy equipment financing or merchant cash advances) are inherently tied to some type of asset or receivable. That may give the lender more confidence that the borrowed funds will be repaid or could easily be recouped in some way.

Recommended: Small Business Equipment Financing

Demonstrate Borrower Commitment

Personal guarantees also demonstrate borrower commitment. If the borrower fails to repay the loan, they are at risk of losing their assets. The lender knows the borrower is serious if they’re willing to put their assets on the line, and may be more likely to lend to them with favorable rates and terms.

Loans and Financing Options That Require a Personal Guarantee

A personal guarantee is generally required for small businesses and startups. These businesses may not be fully established yet, so using an owner’s or partner’s credit can strengthen the application. And using debt financing secured with a personal guarantee can allow you to retain ownership of your company rather than hand over a chunk of equity to external investors in exchange for funding.

The following types of business financing typically need a personal guarantee:

SBA loans

SBA loans may require an unlimited personal guarantee for any individual owning 20% or more of the business applying for a loan. There are multiple types of SBA loans, so you can explore all options and determine which financing solution is best suited for your needs.

Short-Term Business Loans

There are many different types of short-term business loans, some of which may require a personal guarantee. These loans are typically used to help with cash flow issues or emergency expenses. You can often apply online and get quick funding if you qualify. Term loans are likely to be secured by a guarantee, so check your offer carefully.

Long-Term Business Loans

Long-term business loans typically last anywhere between three and 10 years, or even longer if your business is making a major capital investment like real estate. Depending on the situation, you may be able to use business assets (like equipment or property) as collateral for long-term business loans. Personal credit may also be considered as part of the loan application, and a personal guarantee or blanket lien on the business could be a stipulation to qualify.

Recommended: What Is a Personal Business Loan?

Benefits of Personal Guarantees

While a personal guarantee increases your financial responsibility for the success of your company, there are some benefits that come along with it. Most importantly, it can help your business qualify for financing for which it might otherwise not be eligible.

Increases Approval Chances

A personal guarantee helps increase your chances of approval for the loan. The lender views you as a less risky borrower because if you default on the loan, the lender can seize your assets. This allows them to recoup some of their losses if the business cannot repay the loan.

May Get Better Loan Terms

A personal guarantee could also improve the conditions of your loan. While there’s an increased risk for you, you might receive a lower interest rate, a larger loan amount, or a longer payoff term. In fact, some business owners use a personal guarantee even when it’s not required just so they can take advantage of these benefits. The better your personal credit, the better the business loan terms you can expect.

Recommended: What Is the Minimum Credit Score for a Business Loan?

Risks of Personal Guarantees

Signing a personal guarantee brings with it a significant amount of risk for the borrower. If the business defaults on the loan, legal action could be taken against you to repay the loan balance, and you could lose your personal assets.

Note that some states have homestead laws, which prohibit creditors from seizing your primary residence and retirement savings accounts.

If things go badly for your business, the repercussions from signing a personal guarantee can harm both your business and personal credit scores. Plus, you may be responsible for the lender’s legal fees if it must take legal action in order to collect the debt. That amount is added to whatever balance you have on the business loan, as well as your own legal fees.

It’s difficult to get out of a personal guarantee before the loan is paid off. Filing for small business bankruptcy typically doesn’t get you out of a personal guarantee — only personal bankruptcy can do that. The personal guarantee may also stay in place even if you sell your business.

Financial Impact of a Personal Guarantee

Signing a personal guarantee can affect your finances, but usually only if the loan goes into default. If your business is up-to-date on its loan payments, it usually doesn’t show up on your individual credit report.

The financial impacts of a personal guarantee include the impact on your personal credit and the seizure of personal assets.

Impact on Personal Credit

If your business defaults on the loan, that could show up on your credit report, as would any collections or judgment issued. Negative or derogatory marks on your credit report typically last between seven and 10 years. The more severe the default, the lower your score will drop. This can impact your ability to qualify for financing for years to come. And if you do qualify, you’ll likely be subject to extremely high interest rates.

Seizure of Personal Assets

A personal guarantee can also affect your finances if you go into default and the lender seizes your personal assets. If you put up a savings account as collateral, for example, the lender could take this. Before taking out a small business loan or line of credit with a personal guarantee, it’s important you have a plan in place to pay it back.

Finally, a personal guarantee that goes into collections could impact your spouse, too, if you don’t explicitly have joint assets excluded from the guarantee.

Alternatives to a Personal Guarantee

Lenders are likely to want some form of security to lower their risk when they extend loans to businesses with less-than-stellar credit or no track record. There may be options that can take the place of a personal guarantee in terms of allowing you to obtain better credit terms. They include:

Collateral: One way a business may be able to get better terms on a loan is by offering collateral. Collateral is an asset or set of assets that helps secure the loan and lowers the risk for the lender if the company defaults on the loan. In the event of default, a lender can claim your pledged collateral for the debt owed.

Blanket business lien: A blanket lien is similar to a personal guarantee, except that it offers up the business’s assets as security as opposed to your personal assets. If your business fails to repay and defaults on the loan, the lender is entitled to possess and/or liquidate your business’s assets to fulfill your debt. Note that some lenders may require a personal guarantee in addition to a blanket lien, meaning that if your business assets aren’t enough to pay back what your business owes them, they can go after your personal assets, too.

Managing Personal Guarantee Risk

Managing personal guarantee risk requires careful financial planning and strategic decision-making. To reduce the risk of a personal guarantee, your business should:

•  Assess guarantee terms before signing to understand the liability fully.

•  Opt for a limited personal guarantee to cap potential losses.

•  Negotiate terms, such as a sunset clause, to reduce long-term risk.

•  Consult a financial advisor or attorney for expert guidance.

•  Keep business and personal finances separate to protect personal wealth.

•  Maintain a financial cushion by setting aside an emergency fund.

•  Secure insurance coverage, such as liability or business interruption insurance.

•  Consider partnerships or investors to reduce reliance on personal guarantees.

•  Take proactive steps to limit liability and ensure financial stability.

The Takeaway

A personal guarantee is commonplace in the world of small business loans. But it’s still important to understand the full scope of your responsibility so that you’re aware of the risks and certain that you’re willing to take them.

Although agreeing to a personal guarantee is likely to improve the terms of the loans you qualify for, it’s good to know what’s on offer without a personal guarantee, as well.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What is a personal guarantee?

A personal guarantee is a legal commitment by an individual, usually a business owner or partner, to repay a business loan if the business itself is unable to do so. It makes the guarantor personally liable for the loan, meaning that their personal assets can be pursued by the lender in the event of default.

How does providing a personal guarantee impact my personal credit score and financial standing?

Providing a personal guarantee can impact your personal credit score if the business defaults on the loan and the lender reports the default to credit agencies. It’s important to make sure you pay your loan on time each and every month.

What are the consequences if my business defaults on a loan that I have personally guaranteed?

If the business defaults on a loan with a personal guarantee, the lender can pursue the guarantor’s personal assets, such as bank accounts, real estate, or other property, to recover the owed amount. This can lead to significant financial strain and potentially impact the guarantor’s personal financial stability.

Can I negotiate the terms of a personal guarantee?

Yes, you can negotiate personal guarantee terms. Options include limiting liability, adding a sunset clause, or capping the guarantee amount. Lenders may agree to modifications based on business performance or collateral.

What happens if I want to remove a personal guarantee from a loan?

To remove a personal guarantee, you must negotiate with the lender, often by refinancing, demonstrating strong business financials, or replacing it with collateral. Some agreements include a sunset clause for automatic removal after meeting conditions.

Photo credit: iStock/supersizer

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOSMB-Q125-023

It happens. Business is chugging right along — until it isn’t. You might have a slow month or two when you find it difficult to cover business expenses, including payroll. What then? How can you ensure your staff gets paid as your business gets back to normal?

Fortunately, there are business loans you can use to cover such expenses at times like these. In fact, there are even specific payroll loans to help.

To clarify your options, here’s a closer look at small business loans that cover payroll.

What Are Payroll Loans?

“Payroll loans” is an umbrella term for any type of short-term financing that small businesses can use to cover payroll and related expenses, such as staff health insurance premiums.

Many different loan types are under this umbrella, including short-term business loans, business lines of credit, invoice factoring, cash advances, and working capital loans.

Because payroll loans have to be funded fast, they’re frequently offered by online, alternative lenders, though you may be able to get one through a bank or credit union as well. Qualification requirements, interest rates, and repayment terms for a payroll loan will vary by the lender and the amount of the loan.

How Do Payroll Loans Work?

As noted above, payroll loans fund quickly (sometimes in just a few days) and generally have a repayment term of one year or less. Specifics about how your payroll loan works will depend on the type of loan you choose.

For these short-term loans, you may be required to make weekly — or even daily — payments to the lender throughout the life of the loan. Payments usually contain principal and interest.

Common Uses for Payroll Loans

Payroll loans can typically be used to cover payroll, payroll taxes, and employee benefits. Before applying for any kind of business loan, however, it’s wise to research any rules about what that loan can be used for, so you can be sure to stay within those parameters.

Depending on the type of loan you choose, you may also be able to use a payroll loan to cover other business expenses such as inventory and office supplies.

4 Types of Payroll Loans

Payroll financing is generally offered via these four types of small business loans.

1. Invoice Factoring

If you have unpaid customer invoices, you may be able to borrow money against those invoices with invoice factoring.

With this type of financing, you sell your invoices to a factoring company, which then forwards you up to 90% of their value right away. The factoring company then owns the invoices and gets paid when it collects from your customers. Once the factoring company gets paid, you get the remaining value of those invoices, minus a fee. Keep in mind, though, that invoice factoring can cost more than other forms of business financing.

2. Short-Term Loans

If you need to make employee payroll right away, a short-term business loan could come in handy. These loans are typically offered to small businesses by online lenders. Once you get approved, you can access the funds quickly — sometimes on the same day. However, the repayment terms are short (often three to 18 months), and interest rates tend to be higher than longer-term small business loans.

3. Cash Advances

Instead of getting a loan to cover payroll, you may be able to get a cash advance based on the volume of your credit card receipts. With this type of financing, called a merchant cash advance, the funding provider gets paid back by taking a portion of your future credit card sales each day.

You can usually get approved fast (often within a day or two) with minimal paperwork. But you’ll likely pay for this convenience in the form of higher interest rates.

4. Lines of Credit

Another option to consider is a business line of credit. Rather than getting all your money at once, you can borrow against the line of credit whenever you need cash. You can borrow a little, pay it back, and then borrow again. Terms will vary by lender, but interest on lines of credit can be lower than credit card rates.

Advantages and Disadvantages of Payroll Loans

If you’re considering a small business payroll loan, weigh the pros and cons.

Pros of Small Business Payroll Loans

Some payroll loans require minimal paperwork, vs. others like bank loans or Small Business Administration (SBA) loans. That means you may be able to apply and get approved within minutes. Many lenders will deposit funds in your bank account the next business day, so you can get the cash when you need it.

Certain payroll loans for small business are easier to qualify for than others. Some business loans don’t do credit checks; others consider qualifications other than your credit scores.

And finally, you could lower your risk of staff turnover. Rather than struggling to pay staff, being able to keep payroll smooth and steady can help you keep those great hires you’ve invested time and money in.

Cons of Small Business Payroll Loans

Depending on the type of loan, you may need to repay it within a year or so. The payments may be large and could cut into your profit margins. It can be a good idea to plan out how you’ll pay your loan back as part of your monthly budget.

Likewise, some loans come with higher interest rates, particularly short-term business loans. If you can’t qualify for a bank loan or an SBA loan, your interest rate may rise into the double digits.

And while a payroll loan can solve short-term cash crunches, it won’t be much help if you have bigger financial issues. Consider it a Band-Aid, not a long-term solution.

How to Apply for a Payroll Loan

Once you’ve explored your options for payroll loans, it’s time to choose the one that’s the best fit for you.

The better your credit, the better the terms you are likely to qualify for. This is generally the case for loans.

If you have a high credit score, consider a long-term loan from a bank or the SBA.

If your credit’s less than stellar, there are options that may cost more. Look to merchant cash advances, short-term loans, and lines of credit.

Recommended: Equipment Financing

What Are the Requirements for a Payroll Loan?

Once you’ve landed on the best fit, review the requirements to make sure you meet them. These may include the following:

Business Credit Score

If you have a business credit card and have established a credit history through your business, then your company has a business credit score that is separate from your personal credit score. The higher your business credit score, the more likely you are to get a bank business loan with attractive rates and terms.

Business History

Banks typically want evidence that you’ve been in business for at least two years, since this indicates that you have a successful business model. Online and alternative lenders may have less stringent requirements for how long you’ve been in business.

Debt-to-Equity Ratio

This is the ratio of your existing debt to your business equity. It’s okay if you are carrying some debt, but to approve a loan, banks ordinarily like to see a healthy balance between debt and equity. Generally, a debt-to-equity ratio of around 1 or 1.5 is considered good, but that may vary depending on your industry.

Business Plan

Banks and other lenders will often want potential borrowers to submit a plan for how they will use the loaned funds. Even if you only plan to use the money for payroll, you may want to make a business plan. It demonstrates that you have fully thought through how much you need, how you will use the capital, and how you will pay it back.

Collateral

Some business loans require that you put up an asset to secure the loan. Known as collateral, the asset could be real estate, equipment, vehicles, or other tangible assets owned by you or your business. If your business can’t repay the loan in full, the lender can recoup its losses by seizing the collateral.

Alternative Small Business Loan Options

It’s a smart practice to be mindful of all your financing options, whether you need to cover payroll or another business expense.

Inventory Financing

If you buy and sell products, you likely spend a large portion of your money on inventory. Did you know that you can use the inventory you’re buying as collateral for a loan to purchase the inventory? Lenders will give you a percentage of the value of your inventory as a loan. Be aware that, should you not be able to pay it back, the lender can take the inventory to cover your debt.

Equipment Loans

Just as inventory financing uses inventory as the collateral, equipment loans use the equipment you’re buying as the collateral. Securing the loan in this way often helps you get a low interest rate. Equipment loans can be used to buy computers, heavy machinery, or company vehicles.

The Takeaway

Payroll loans are a type of short-term financing that small businesses can access quickly to cover wages and related expenses. Lenders will assess the business’s cash flow, history, debt-to-equity ratio, and credit score, among other criteria. Though rates on short-term loans tend to be high, you may be able to negotiate better terms by offering collateral, such as business inventory or equipment.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

Can SBA loans be used for payroll purposes?

Yes, the Small Business Administration (SBA) has several loans that you could use for payroll and related expenses. These include 7(a) loans and SBA Express loans.

What does it take to qualify for payroll loans?

That will depend on the type of payroll loan you plan to apply for. If you opt for a short-term business loan from an online lender, you will generally need to show a personal credit score in the 600s, have at least one year of business history, and provide proof of business income.

How exactly do payroll loans work?

The details of a payroll loan will depend on the type of loan you want. However, in general, payroll loans work like any other type of short-term business financing. A lender forwards you a lump sum of capital that you agree to pay back (plus interest) in installments — which may be daily, weekly, or monthly — during the loan’s term. In the case of a payroll loan, the money you borrow is used for the specific purpose of paying your employees.

What are the risks of using a payroll loan?

If you take out a secured payroll loan — that is, one involving collateral — the bank’s risk is reduced, but yours increases. That’s because, if you default, the bank can seize your collateral. Also, short-term loan payments can be hefty, potentially reducing your cash flow and prolonging the debt crunch.

Can payroll loans help businesses avoid layoffs?

Yes. A business may not need to resort to layoffs or reducing company benefits if it can borrow money to cover wages and employment expenses. Avoiding layoffs could also help keep both morale and productivity high, which may in turn boost company revenues.

Photo credit: iStock/sasirin pamai

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Equipment leasing can be a convenient way to access the machinery your business needs. When you lease equipment, you rent it from a leasing company, commercial vendor, or even a lender who owns the asset (known as the lessor). The agreement allows you (the lessee) to use the equipment for a set period of time while making regular payments. When the lease period ends, you return the equipment to the lessor. Some agreements give you the option to buy it at the end of the lease.

This arrangement can be practical if you only need the equipment for a short while or prefer not to take out a loan for purchasing. Equipment that’s commonly available for lease includes vehicles, machinery, and specialty appliances.

Recommended: Heavy Equipment Financing

Types of Equipment Leases

There are two basic types of equipment lease: operating leases and finance leases (also called capital leases). Related arrangements, such as sale-leaseback agreements, exist to provide additional financial flexibility.

Operating Leases

An operating lease is similar to a rental contract. It allows a business to lease equipment for a set period of time without necessarily purchasing the equipment at the end. Instead, ownership of the equipment stays with the lessor, who may also maintain and insure the equipment. Operating leases sometimes provide for early termination of the contract but may charge a hefty penalty.

Capital Leases

Capital leases — now also known as finance leases — are designed to be a pathway to ownership. Your business pays to use the equipment for a set period of time, and at the end of the lease term, you’d typically purchase the equipment. A capital lease is usually non-cancellable.

Sale-Leaseback Arrangements

With a sale-leaseback, you sell a piece of equipment and then lease it back from its new owner. You don’t even have to relocate the equipment. The advantages of this arrangement: It frees up working capital for your business and can help improve your balance sheet. There’s no need for a business line of credit, as you can use the sale proceeds to expand, hire additional employees, or build new products.

However, depending on the terms of the lease, the company may have to forgo some tax benefits. Be sure to consult a CPA or other tax professional about whether a sale-leaseback is appropriate for your business circumstances.

Recommended: Online Business Loans: Compare and Apply

Equipment Leasing vs Buying

When deciding on leasing vs. purchasing equipment, look beyond the monthly payment amount. If you need the equipment for only a short period of time, leasing can be a good choice. It may also be practical if the equipment changes rapidly with new technology, like computers or certain medical devices. Leasing gives you the flexibility to upgrade to newer models more easily without worrying about the sunk cost of owning the older version.

Leasing can also be preferable for certain types of businesses where the equipment is large and expensive. For example, farmers may not have the cash flow to support big payments on farm business loans for tractors and harvesters.

However, over the long term, buying is usually cheaper than leasing. If the equipment is unchanging and durable and you expect to need it indefinitely, small business financing may be a more prudent choice.

Recommended: Business Auto Loans: How to Get Financing

Tax Considerations

Given variations in state and local taxes, your lease arrangements could affect your tax bill. Check with your leasing company and your tax attorney or accountant for specifics. Some issues to discuss might include the following:

•  Are your equipment lease payments deductible on your federal or state taxes?

•  Does your state or local government assess tangible personal property taxes on rented or leased equipment?

•  If you have a finance lease, are you considered the owner for tax purposes?

•  If so, can you claim the equipment’s depreciation on your federal or state tax return?

•  If you have an operating lease, can you claim depreciation on your federal or state tax return?

Qualification Requirements

Lease requirements will vary depending on the lessor, but most leasing companies consider things like business history, credit scores, cash flow, and profitability.

With leases and loans, companies with longer track records often get approved more easily than startups. So new firms may want to compare their lease options to possible purchases through startup business loans.

Equipment financing companies, lessors, and lenders can vary in their opinions of acceptable credit scores. Business owners with low credit scores may want to explore bad credit equipment financing options.

Even applicants without high credit scores may be able to qualify for a lease or loan if their company’s finances are strong enough. Evidence from the business’s recent financial documents, such as income statements and tax returns, can boost the chances of approval for a lease or equipment financing.

💡 Recommended: Financing Farm Equipment

Payment Structures

Equipment leases may or may not involve down payments. The leases usually offer fixed interest rates for the duration of the contract. The rates depend on your credit, the lease term, and the type of equipment, among other factors.

You can expect to pay other costs when leasing equipment, such as delivery, maintenance, and installation charges; appraisal fees; insurance; and state and local taxes or fees.

💡 Recommended: Restaurant Equipment Financing

End-of-Lease Options

Finance leases, once known as capital leases, generally allow the lessee to purchase the equipment at the end of the term. You may be able to buy it for far less than the fair market value, especially if you had what’s known as a $1 buyout lease.

If you have an operating lease and don’t want to buy the equipment at the end of the term, you simply return the item to the lessor.

Most equipment lease agreements will spell out rules for canceling the lease before the term ends. Operating leases often give you the option of early termination, but you’re likely to be charged a hefty fee.

💡 Recommended: Commercial Truck Financing

The Takeaway

Equipment leasing for your business can be practical in many situations, such as when you need the equipment only temporarily or when the technology is upgraded frequently. Leasing equipment is cheaper upfront, as a down payment may not be needed, but over the life of the lease, the total outlay may exceed the purchase price. Lease agreements may affect your balance sheet and tax bill, so consult your accountant or other tax professional before you decide.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What’s the difference between an operating and a capital lease?

Capital leases, also known as finance leases, are designed as a pathway to ownership. Canceling a capital lease can be very difficult and expensive. Operating leases are more similar to rental contracts. You are generally able to cancel the contract early with an early termination fee.

How do I qualify for equipment leasing?

Qualification requirements will vary by the leasing company, but most consider facts like the business’s years of operation, credit scores, cash flow, and profitability.

What happens at the end of the lease?

At the end of many operating leases, you return the equipment to the owner. Capital leases, now known as finance leases, enable the lessee to buy the equipment when the lease concludes.

Can I buy the equipment after the lease?

Many lease contracts give you the option to purchase the equipment at the end of the term, especially finance leases. The price you pay at that time may be the fair market value, or it may be less. If you don’t want to buy the equipment, you simply return it to the owner.

Can I upgrade equipment during the lease term?

Yes, you may be able to upgrade equipment during a lease, depending on the type and terms of the contract. In fact, being able to upgrade equipment easily is a significant advantage of leasing.

Photo credit: iStock/ExperienceInteriors

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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