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.
Key Points
• Heavy equipment financing lets you spread out purchase or lease costs by paying in installments over time. This helps your business maintain cash flow.
• Financing options include loans, leasing, lines of credit, and sale-leaseback arrangements.
• Lenders review your credit, business history, and industry factors.
• Interest rates and terms vary by lender and are tied to your business’s financial health.
• Your business may be eligible for several financing-related tax breaks, such as interest deductions and depreciation options.
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.
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