Qualifying for Equipment Funding

Not every lender will have the exact same set of requirements, but there are a few things for which you should be prepared before you apply.

First, you should know specifically what you’re planning to buy, where you’ll get it, and what it will cost. While in some cases estimates may be acceptable, no lender is going to be impressed by haphazard generalizations. “I’m thinking maybe X dollars should get me a whole bunch of good stuff” is not sufficient. It’s also important to establish the value of the equipment as collateral. If you are unable to pay back the loan, what would this equipment be worth to the lender? Establishing the value of the equipment you’re purchasing as collateral for the loan not only improves your chances of getting funding in the first place, it lowers the likely interest rate you’ll be paying and may help you avoid other optional fees or charges as well.

Second, your credit is a major consideration for determining whether or not to approve your equipment loan and what sorts of interest rates and other terms will be offered. If your business has been in operation for several years and has its own credit history, it will be considered first. Your personal credit history and credit score are important factors as well. The better your score, the more likely you’ll be approved and the more favorable the terms you’ll be offered.

It’s possible to find lenders who specialize in high-risk loans. You may be able to explore equipment loans for bad credit, but just as you’d expect with a personal loan or auto loan for bad credit, terms won’t be as favorable and interest rates will be higher. You may encounter limits on how much you can borrow which complicate your plans as well. That doesn’t mean you shouldn’t consider all of your options, but be prepared to make your best case why you’re a good risk for this loan, despite your past credit history.

Finally, many lenders will request to see a copy of your business plan and documentation of your current financial status. Usually this includes annual revenue and a detailed profit and loss statement if available. They want to see whether or not the math makes sense – will you be able to pay back this loan reliably based on what they see on the paperwork in front of them? If you believe your profits are likely to increase as a result of the new equipment, be prepared to document and justify this to lenders.

Vendor Leasing

Some equipment companies (your “vendors”) offer their own financing or leasing options. Like many car dealerships, they recognize that the high price of the items being sold means many customers will require some alternatives in order to actually make the purchase. Larger companies may have in-house financing which they manage themselves, while others work with third-party lenders to provide you options for stretching out payments on new equipment.

Either way, the use of the term “leasing” should not be understood to suggest this is a rental with option to return unless such provisions are explicitly spelled out in the agreement. This is a purchase paid out over time, generally with interest and a set payment schedule. Not making a payment could result in not only losing the equipment but substantial damage to your personal credit rating as well as that of your business.

This sort of “vendor leasing” arrangement can be quite convenient, but it’s important to pay attention to the details before you commit. Some will insist on a sizeable down payment before the equipment is actually delivered. Others carry specific penalties for late payments or early pay-off. Customer service varies widely, since in many cases whatever financing they offer is secondary to their primary business model. It’s simply impossible for institutions offering financial services “on the side” to truly compare with those who specialize in the field and who want your return business for your future fiscal needs.

One other factor when considering vendor leasing is that vendors are generally only interested in financing equipment you’re purchasing from them. (You wouldn’t go to a Ford dealership and ask if they could put together a better loan package on the Kia you’re wanting to buy down the street than what the Kia dealer is offering.) If your business is purchasing equipment from multiple vendors, this means multiple applications, multiple credit checks, multiple loans and multiple payments every month. Bundling your equipment financing and using a local or online lender, on the other hand, simplifies things considerably.