Most businesses need equipment to run their operations at full capacity. What they may not have at any given time is the ability to buy all the equipment they need out of pocket. Equipment loans and leases can fill the gap, but borrowers with bad credit may worry that they’ll be locked out of the financing they need.
Below, we’ll take a look at some of the challenges borrowers with bad credit may face in trying to get equipment financing — and some of the equipment financing solutions they can use to get around them.
Is It Possible To Get An Equipment Lease Or Loan With Bad Credit?
The short answer is “yes,” but it may take a little more work.
Equipment loans are an interesting case. As secured loans, you might assume they’d be less risky for the lenders than many of the unsecured loans offered to businesses with poor credit. While there’s some truth to that, the longer-term lengths of equipment loans still mean it will be a while before your lender recoups their investment. Because of this, you’ll see many equipment loans with minimum credit score requirements in the mid-to-high 600s. That can put them out of reach of someone who has recently endured financial hardship. As is usually the case when it comes to lending, there are exceptions, however.
Equipment leases cover a much larger spectrum of agreements, although many of them are even more credit-contingent than those of loans. The amount of leeway you’re cut will depend on the type of lease you’re applying for, and your lessors’ business model.
Bad Credit Problems You Might Encounter
Before we get to the solutions, let’s take a look at some of the challenges you may encounter when you try to get equipment financing with bad credit.
1) Fewer Options
It may not be fair, but businesses with better credit will always have more options than businesses that don’t. Your search changes from “the best possible deal” to the “best deal possible with my credit rating.”
That doesn’t necessarily mean there won’t be a lot of options, however. Many online lenders specialize in financing customers with bad credit. Just expect to do your due diligence and make sure you’re dealing with a reputable lender that won’t needlessly gouge you.
2) Higher Rates
Even the lenders who don’t use credit ratings to rule out borrowers often still use it to segment their borrowers into different grades. The better your credit, the lower the rates you’ll qualify for. Likewise, the worse your credit, the higher your rates will probably be.
Keep in mind, however, that not every financer weights credit score the same. The degree to which the funder depends on credit will vary based on how many other sources of information they have on you regarding your fitness as a buyer. Repeat customers, for example, are often given leeway that new customers aren’t.
3) Unsatisfactory Terms
Credit issues may constrain the type of agreement you qualify for. For example, you may have to settle for a lease with a higher or lower residual than you may have wanted. Alternately, you may end up with a term length that doesn’t fit your needs.
4) Bigger Downpayments
In some cases, reluctant lenders can be placated by offering them more money at the beginning of your term. In the case of loans, this may come in the form of a larger downpayment. In the case of leases, they may ask for an additional month’s payment upfront. Depending on how much cash you have on hand, this may or may not create unnecessary strain on your bottom line.
You also run a higher risk of your application simply being rejected. Filling out applications takes time — time you could be spending on any other business-related-activity. Not only that, but too many pulls of your credit–especially hard pulls–can actually have a negative effect on your credit score.
The fewer applications you have to fill out and subject your credit to, the better.
7 Ways To Get Equipment Leases & Loans If You Have Poor Credit
So now you have an idea of the challenges you can face when looking for equipment financing while you have bad credit. Here are some ways you can overcome those challenges:
1) Improve Your Credit
It may not surprise you to hear that the best way to avoid having to apply for equipment financing with bad credit is to not have bad credit. Improving your credit takes time, but there are a number of different ways to go about it including:
- Settling outstanding debts
- Consistently paying your bills on time
- Ask for higher credit limits on your credit cards
- Don’t utilize all the available credit you have
2) Get A Co-Signer
You are more than a credit score. Financers don’t necessarily know that, but your friends and family do. If they trust you enough to do so, consider asking them to co-sign your loan if your lender gives you the option. Co-signing essentially adds an additional party as a guarantor for the loan or lease.
Just remember you’re putting your co-signer on the hook for your debt if you default. Be sure to read the fine print and make sure you understand what liens are involved and what kinds of assets are at risk beyond the equipment you’re financing. At the very least, both you and the co-signer will take a credit hit.
3) Take The Best Offer & Refinance
If you need help right away, you can always take a sub-par loan offer now and then refinance when you have access to better rates, either due to your credit improving or you having more time to hunt down a better deal. Keep in mind that this may not be an option with a lease, at least not until you’ve fulfilled your lease obligations.
4) Offer To Make A Bigger Downpayment
I mentioned this earlier under the “problem” section, but it’s also a solution. If your financer is on the fence about your application, you can sweeten the deal by offering to put more money down. In the case of a loan, it would be a larger downpayment. In the case of a lease, you could offer to pay the first and/or last month’s payment in advance.
5) Prioritize Equipment That Holds Its Value
When it comes to financing equipment, the equipment in question matters quite a bit. Remember, the equipment is the collateral. If you’re a lender, wouldn’t it be less risky to finance an item that retains more of its value over a longer period of time? That means you may have an easier time getting approved for, say, heavy machinery than you would an item that depreciates quickly, like a computer.
6) Prioritize More Expensive Equipment
Surprised? For the most part, big-ticket items tend to hold onto more of their value than less expensive items (consider how often you’d buy a tractor versus, say, a smartphone). If you default, your financer will prefer to collect an item that is still worth their time and effort to resell. Because of this, you may find that a prospective lender will be more accommodating if you have a more expensive piece of equipment in mind.
7) Defer Buying Until Your Situation Improves
While the newest models of a piece of equipment often come with intriguing bells and whistles, it doesn’t always pay to be an early adopter. If the older equipment you’re using right now still works or just needs minor repairs, it may be enough to carry you over the gap until your finances are in order. Besides, many times new models still have some bugs to work out.
Don’t Let Bad Credit Stop You From Getting Equipment Financing
Bad credit makes getting most kinds of financing more challenging, but it doesn’t necessarily have to stop you cold. With the right strategy and the right financer, you can get the equipment loan or lease you need to keep your business humming.
Need help finding an equipment financer? Check out our list of best equipment financers for small businesses. If you’re interested in more specialized guides, check out our resources on financing restaurant or gym equipment.
Confused about some of the terminology used in equipment financing? We can break down the differences between equipment loans and leases for you.
The post Bad Credit Equipment Leasing & Loans: 7 Equipment Financing Solutions If You Have Poor Credit appeared first on Merchant Maverick.