How to Secure Equipment Financing
Every smart business owner knows the advantages of equipment financing. When done strategically, financing can help improve cash flow, build business credit, provide tax deduction benefits and help drive business goals.
However, the myriad of finance options can be daunting and the process can be burdensome, especially for start-ups or small businesses applying for the first time. Here are five unbiased tips to help you navigate the equipment finance process, along with a few bonus tips you won’t find on any lender’s website.
Assess your Equipment and Budget Needs
Is this your first asset purchase? Are you adding to an existing inventory? Do you need a fleet management solution?
Each of these will have different financing options and conditions. New equipment will usually have more competitive interest rates and term lengths, however used equipment will have a lower price tag which can translate to lower monthly costs.
Each business circumstance is unique, but once you have analyzed your cash flow and selected the equipment it’s important to remain flexible until the qualification process is complete.
Bonus Tip
Some lenders put limits on the age or location of equipment so be sure to provide complete equipment details on the finance application.
Review Your Lender Options
An array of lenders is available, and each will have different requirements, approval rates and flexibility. Don’t assume the rates and monthly payments you find online will apply to you — your interest rate, repayment terms and loan conditions will vary depending on which lender you select, the asset value, and your business portfolio.
Your local bank or credit union is usually a good place to start, especially if you already have an established relationship with them. Depending on how much capital you need, they may also offer alternative finance options such as a Line of Credit or credit cards.
Equipment dealers can provide in-house financing options with competitive interest rates and fast approvals, though a good credit score and two to three years in business are usually prerequisites. They will also have options for businesses building a larger fleet.
Finance companies specializing in equipment lending are abundant, offering varying rates and terms. They may have multiple funding sources and are willing to work with start-ups and businesses across a range of credit ratings. However, their rates and down payments may be higher, reflecting the higher risk involved.
Government-backed Small Business Loans are available, though the criteria to secure one can be restrictive, and the blanket liens they file are notoriously hard to terminate.
“Bootstrapping” or borrowing money from friends and family can be viable but be sure to research the legal requirements and tax implications.
No matter which path you choose, it is best to partner with a skilled lender who understands your business and can offer tailored solutions that align with your cash flow and work needs.
Bonus Tip
Shopping lenders? Ensure they aren’t doing “hard” credit inquiries which can impact your credit score.
Prepare Financial Statements
Unless you have a corporation with established business credit, both your personal and business finances will likely be used in assessing creditworthiness. The higher the value of the equipment loan and the higher the risk factors, the more information the lender will want to see.
It will vary by lender, but a straightforward application typically requires:
- Completed Credit Application
- Vendor/Seller Information
- Detailed Equipment Invoice
- Bank Statements (3 months)
- Time in Business
A more detailed application may additionally require:
- Two to three years Business Tax Returns
- Two to three years Personal Tax Returns
- Balance Sheet, Profit and Loss Statements
- Current Interim Statement
- Personal Financial Statement
Financing transactions are most often delayed by a lack of communication or information. The faster you can get the information to the lender, the faster they can evaluate, underwrite and fund the loan.
Bonus Tip
No Social Security Number? Some lenders will accept an Individual Taxpayer Identification Number (ITIN) provided other eligibility requirements are met.
Beyond the Financials – ‘Tell Your Story’
If you are applying for your first business loan or if you fall into a higher risk category, you’ll likely need to do a bit more legwork in order to qualify for financing. Here are some additional considerations to help you prepare for a more rigorous application process.
If you haven’t already, register your business with the Secretary of State or County Clerk’s office as a Corporation, LLC, or Sole Proprietorship.
Review your personal credit score. Resolve any late payments on loans or credit cards. Don’t panic if your credit score is less than ideal. Some lenders have more flexibility though they will often need a heftier downpayment and more information to support the application.
Be prepared to build a solid business case for the lender — tell your story! Compile a resume showcasing your experience in the industry and gather supporting documentation like 1099’s or Schedule C tax records if applicable.
Secure work agreements, obtain letters of reference or signed contracts to support your application. Outline projected revenue and explain how the equipment will help grow your business.
Demonstrate proof of funds for a downpayment by depositing money into a business bank account.
Didn’t qualify for the equipment you initially wanted? Try applying for a lower dollar asset and build a relationship with the lender.
Bonus Tip
Help establish business credit by opening trade lines with businesses that report to credit reporting agencies.
Post-Application Considerations
You’ve done the hard work of researching the equipment, partnered with a trusted lender, and applied for the loan. In an ideal scenario the approval occurs quickly, and the transaction is complete.
However, depending on the lender and the individual circumstances, more steps may be needed. Prevent delays by speaking with your finance company about potential post-application requirements. Here are a few to consider:
- Proof of equipment insurance is usually required prior to approval
- Many lenders require GPS installation on the equipment
- Some finance companies will perform on-site inspections and serial number confirmations prior to funding
- In addition to a down payment, some lenders will also collect the first and last payment upfront so be sure to have sufficient cash flow prepared.
With some advanced preparation and research, equipment financing can be a simple — and even quick — process.
Whether you’re a seasoned entrepreneur or a small business owner exploring financing for the first time, effective equipment financing can unlock opportunities and become a powerful tool to drive your business forward.
Renée Lauzon-Martin is general manager with HDD Broker LLC.
