Do you own a small business that depends on heavy equipment? Whether you own a construction company or deal in excavation, building maintenance, food production, or another industry, you know just how expensive equipment like forklifts, loaders and manufacturing equipment can be. Heavy equipment financing or leasing may be what you need to purchase the equipment that will help you grow your business.
Even if you don’t have the cash to pay for it upfront (few businesses do), there are plenty of heavy equipment financing solutions at your disposal that can help you conserve working capital and still get the equipment you need to run your business.
What’s the Difference Between Leasing and Financing?
If you’re in need of heavy equipment, you have the option to buy or lease it. When you buy heavy equipment, you own it once you pay off your loan. With business equipment leasing, however, you rent the equipment for a certain period of time and return it eventually. If you’re unsure of whether you should buy or lease, take a look at the pros and cons of each option.
Pros of Buying Heavy Equipment
- Freedom to make changes: When you buy heavy equipment, you can modify it as you see fit. You’ll own it and can customize it to meet your unique needs and preferences.
- You own an asset: The equipment you purchase will be an asset on your balance sheet, and when you are done with it, you can sell it and recoup some of your initial investment. Once you’ve paid for it, there are no ongoing payments.
- More options: Buying gives you more options than leasing. If you want a specific brand or model, you’ll be able to order it without any issues. You won’t be limited by the equipment a leasing company has in stock.
Cons of Buying Heavy Equipment
- Liable for maintenance: If you buy heavy equipment, you’re responsible for all maintenance costs. Depending on the issues you encounter, those can get quite expensive.
- Higher upfront costs: Initially, it costs more to buy equipment than to lease it, even if you get a great deal on used equipment. This can keep you from buying exactly what you want or need and force you to settle for a less expensive piece of equipment.
- Depreciated value: Over time, equipment like a tractor will depreciate in value. What you can sell it for will be only a fraction of what you paid for it.
Pros of Leasing Heavy Equipment
- Lower upfront costs: Generally speaking, a heavy equipment operating lease comes with lower upfront costs than a purchase. All you have to do is make affordable monthly payments to a leasing company and you can use the equipment until your lease term is up. The leasing company will take care of maintenance and other costs.
- Greater flexibility: It’s not uncommon for a business owner to buy equipment and later find out they don’t want or need it anymore. If you’d like to try out a piece of equipment, leasing equipment is a great option as you can get rid of it once your term comes to an end.
- Access to newer technology: Once your lease is up, you are free to lease a newer model or try something new, and you aren’t saddled with a depreciated piece of equipment to sell. (It may even be possible in some cases to upgrade to different equipment during the term of your lease.)
Heavy Equipment Financing Tax Benefits
If you buy or lease new equipment, you may be able to ease your tax burden with the IRS’ Section 179 deduction. Thanks to Section 179, your business may be able to deduct 100% of the purchase price of the equipment you buy or lease from your taxable income immediately rather than over time. The maximum deductible amount is $1,050,000 in 2021.
To qualify for the Section 179 deduction, you must have a taxable profit. Also, the deduction can only be made up to the amount of your taxable income. So let’s say your business has a taxable profit of $50,000 before the deduction. If you buy a bulldozer that costs $100,000, you can only deduct $50,000 of the purchase in the first year. Talk to your tax advisor to make sure you understand this deduction.
How Does Heavy Equipment Financing Work?
With equipment financing, you can purchase equipment immediately but pay for it over time. This can make expensive equipment more affordable and help preserve cash flow. Typically, the equipment will serve as collateral for the loan, which may make it easier to qualify for than unsecured financing. However, lenders don’t want to repossess collateral so they will still require borrowers to meet certain qualifications.
What is the Typical Interest Rate on a Heavy Equipment Loan?
Interest rates on these loans will vary by lender and by qualification. The lowest interest rates are usually associated with loans from banks, including SBA loans. (Learn more about SBA loan rates here.)
Borrowers with excellent qualifications— good credit scores, a down payment, and at least two years in business— are more likely to qualify for lower rates. It may be possible to get interest rates in the single digits or low teens, depending on qualifications.
Borrowers who are newer to business or with credit challenges may pay interest rates in the mid-to-high teens, or higher depending on the source of financing.
Heavy Equipment Finance: How to Qualify
While the lender you select will dictate the qualifications you must meet to get approved for construction equipment financing, most lenders will require the following.
- Business license or active status with the Secretary of State
- Personal guarantees from all owners
- Minimum credit score of 600
- No bankruptcies in the last 7 years
- No unresolved tax liens
How to Apply for Heavy Equipment Financing
While each equipment loan specialist may have a slightly different application process, you can expect to need a few things before you start:
- Driver’s license or government-issued ID
- Financial and bank statements
- Details on the equipment you plan to buy (typically a quote from the vendor)
Most applications take just minutes, and a lending expert may reach out if the lender needs additional information.
Does Financing Heavy Equipment Require Collateral?
Yes, heavy equipment loans typically require collateral, but the good news is that you have the collateral built in: the equipment you’re purchasing. Lenders want to minimize their risk, and in the event that you can’t pay off the loan, they will take the equipment you financed to cover the balance owed.
Is it Possible to Qualify for Heavy Equipment Loans with Bad Credit?
Many lenders require that you have good or excellent credit to take out a heavy equipment term loan. If you have bad credit, however, don’t worry. Fortunately, there are some lenders who are more lenient and lend money to business owners with all types of credit histories.
Just keep in mind that if you do opt for a heavy equipment loan with bad credit, you may face higher rates and less favorable terms. Unless you’re in dire need of the equipment, you may want to improve your personal and business credit scores before you apply for financing. By doing so, you can save hundreds or even thousands of dollars over the life of your loan.
How Long Can You Finance Heavy Equipment?
Each lender has its own repayment terms, so the amount of time you can finance heavy equipment will depend on the lender you choose. Many business financing options, including Lending Circle and Balboa Capital, offer heavy equipment loans with terms of up to five years. If you’d like a longer heavy equipment loan term, consider Crest Capital as you may be able to secure a loan with seven-year terms.
If you need still longer terms, SBA loans, particularly the 7(a) or 504 loan programs, offer terms of up to 25 years or the useful life of the equipment.
3 Options for Industrial Equipment Financing
If you do some research, you’ll find that many lenders offer industrial equipment financing. Here’s a brief overview of three that we recommend.
Balboa Capital is a financing company that began in 1988 and offers fast access to equipment financing. It can give you same-day funding of up to $250,000 for your heavy equipment purchases and does not require collateral. Terms range from 2 to 5 years.
- Must be in business for at least one year
- No large tax liens or recent bankruptcies
- At least $100,000 in annual sales
- “Decent” credit score
$5,000 – $250,000
- Fast Funding: Once you submit your online application to Balboa Capital, the funds may be distributed to your bank account the same day.
- Corporation-Only Guarantee: Balboa Capital is one of the few lenders that offers a corporation-only guarantee option. This means that your business, rather than you personally, will be on the hook for your equipment loan.
- Relaxed Requirements: Compared to other lenders, Balboa Capital’s requirements are lenient. You can take out a loan without a stellar credit score or collateral.
- Equipment Leasing That Functions Like Financing: If you choose Balboa Capital to fund your equipment, you’ll lease it and buy it from them at the end of your term. So you won’t technically own your equipment as you pay it down.
- Origination Fee: You’ll have to dish out some extra cash for an origination fee that will depend on the specifics of your particular loan.
- Annual Revenue Requirement: To take out an equipment loan, you’ll need to prove that you earn at least $100,000 in annual sales.
LendSpark is a financing company that aims to serve the small- to mid-sized business market with several financing options, including heavy equipment loans.
5% – 35% APR
- 6+ months in business
- Sales of $15,000+/month
- Bad credit OK
Up to $1 million
- High Funding Amounts Available. Not every equipment financing company will cover costs up to $1 million, but LendSpark does.
- Low Requirements. The time-in-business and credit requirements are low enough that even startups can apply.
- Flexible Payback Terms. Terms can be anywhere from three months to five years.
- Your Industry May Prevent You From Getting Approved. LendSpark looks at an applicant’s industry and its position in the economy, as well as current trends in the industry as part of the approval process.
- Approval Process May Be Longer. There is an interview process as part of the application, which may delay your application being approved quickly.
TimePayment is a lender specializing in equipment financing, providing services for both equipment sellers and buyers. The company has been in business for over 30 years.
With TimePayment, you’ll have a factor rate of .0219 – .0626 rather than an APR, depending on your credit profile and length of the lease term.
- Must be a qualified franchise or in business
- A FICO credit score of at least 550
$500 – $100,000
- Fast Online Application: The average approval time is 3.2 seconds
- Financing Options: TimePayment offers both loans and leasing options.
- Smaller Amounts Available: Great for businesses who need smaller amounts of funding.
- Higher Costs Compared to Other Options. For those with excellent credit, other term loans may be more affordable.
- Larger Amounts May Take Longer. For higher dollar amounts, you may not get instant approval.
Other Financing Options
If none of the options above is a good fit, explore other business loans for small business, especially if you have good credit, because you likely can get a better rate elsewhere.
If you only need lower-priced equipment, consider business credit cards as an alternate source of financing.
Nav’s Verdict: Heavy Equipment Financing
When it comes to maintaining steady cash flow, buying something like a commercial vehicle or farm equipment can take a chunk out of your bank account. But a heavy equipment or construction equipment loan can balance out your finances and let you keep humming on all four cylinders.
This article was originally written on March 11, 2020 and updated on February 2, 2023.