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Mechanic Tool Financing: Everything You Need to Know Before Applying

Forest Sisk

Loan Specialst at Fundera
Forest is on the customer success team at Fundera. As a Loan Specialist, he works directly with small business owners throughout the loan process, helping them find the best financing for their companies.

Tools in a home toolbox: not that expensive. However, a mechanic’s tools—your tools—cost more than your average monkey wrench/hammer combo. In fact, sometimes a tool can cost more than the car, truck, or trailer it’s fixing.

But you have so many other day-to-day expenses to cover, between parts, payroll, and your personal life. It would certainly be helpful if you didn’t have to take thousands of dollars straight out of your savings just to keep your tools up to date. Fortunately, with mechanic tool financing, you don’t have to.

If you’ve never heard of mechanic tool financing, we’ve got you covered. Here’s everything you need to know about this niche financing tool, and how to tell if it’s right for your trade.

What Is Mechanic Tool Financing?

For a mechanic, your main material costs are your bays or the actual building in which you operate. You can finance these costs through secured financing, like a mortgage or equipment loan.

The same is true for your tools. Essentially, mechanic tool financing is a subset of equipment financing that pertains strictly to tools (rather than other types of equipment). In this self-collateralized loan, you can leverage your debt against the value of the tools you’re purchasing to get more favorable terms. Although you won’t actually own the tools until you pay off the loan, those payments will be more lax.

That last part is important. Equipment financing—and in this case, mechanic tool financing—allows you to purchase an expensive tool incrementally. You can never own a portion of that item, however. Even if you’ve made 59 of 60 payments and there is only one month left to pay, that equipment isn’t yours until you’ve paid in full.

Equipment Lease vs. Equipment Loan

As an alternative, some business owners prefer to lease their equipment or tools (there is a difference between equipment leasing and equipment loans). Essentially, leasing means you’re paying a lender to borrow their tools for a predetermined amount of time, rather than gradually paying someone to own those tools.

How do you know if an equipment loan or an equipment lease is right for you? Many business owners who make their living on manual labor face this decision. If you can qualify to finance your own tools through a payment plan, you can end up saving big in the long run. That said, if you anticipate that your equipment will become obsolete in a few years, it might make more sense to lease, rather than buy, that tool.

mechanic tool financing

Why to Choose Mechanic Tool Financing Over a Term Loan?

Mechanic tool financing might be more appealing to business owners than traditional term loans, because it allows you to make smaller payments over a longer period of time, and often at a lower cost.

Why is this the case? Most lenders issue business loans based on the merits of the business, without any sort of collateral attached to the loan. If you can show your lender evidence of strong cash flow—like net profit, average bank balances, and number of deposits—then they’ll see that your business can handle additional payments, and they’ll issue you a loan.

Equipment financing, on the other hand, operates under a different set of rules. Because the loan is tied to the asset they’re financing for you, they have guaranteed collateral in hand if you default on your payments. Because of this, the loan is considered less “risky” by your money man. Thanks to that lower risk, your mechanic tool financing agreement will often carry lower rates and longer terms than an unsecured loan would.

This is a much better loan at face value, but keep in mind that you don’t truly own the equipment until you make your final payment. This is a trade-off, but one most owners with stable businesses will accept to secure the tools they need.

Alternative Benefits of Mechanic Tool Financing

Outside of the clear benefit of easing the cost on an important purchase for your business, there are a couple of secondary perks that come with an equipment or mechanic tool loan.

  • Build business credit: Personal credit can only take you so far; the best loan products all require established business credit. Equipment financing offers you the ability to get your business on the credit bureau map.

  • Tax deductible: Equipment loses its value the day you purchase it, and every day thereafter. Doesn’t seem ideal. However, you can write these losses off on your year-end taxes, and end up owing less to Uncle Sam as a result.

How to Qualify for Mechanic Tool Financing

Equipment and mechanic tool lenders look at a different set of characteristics than term lenders do. As we hinted at before, these loans are asset-based, so the amount you can qualify for is intrinsic to the value of the equipment. So, essentially, the lender just wants to make sure you’re established, responsible, and well-versed in your trade.

  • Established: The easiest way to show you’re established is through having other assets pertaining to your business. For instance, if you want a set of brand-new Teng Tools, it’ll help to have three bays to use them in.
  • Responsible: Responsibility, when it comes to financial matters, will always come back to your personal and business credit scores. Have you taken a loan before? Have you paid it back? And on time? These sorts of questions will always yield better approvals with “yes” as an answer, and the strong credit scores to match.
  • Experienced: There is such thing as the talented rookie. ESPN loves them. Having said that, you always want to bet your money on the seasoned veteran, and the same is true for equipment lenders.

For a lender, extending credit is much like making a bet. Before giving out their money, they need to analyze the situation and make an educated decision about which borrowers will return that money, plus interest. Because of this, lenders have more faith in the mechanic who’s been fixing cars for over a decade than the mechanic whose shop is just starting up. You can’t teach experience.

What You’ll Need to Apply for Mechanic Tool Financing

As for documentation, this will vary lender to lender and item to item. If the credit and time in business is there, then some business owners can get away with providing their lender with just equipment quote. Larger loans will require a deeper dig into the filing cabinet, as will less established borrowers.

Having said that, most equipment lenders are comfortable lending off of just an application with basic information about yourself and the business. The only real document necessary will be the quote or invoice for the tools you’re hoping to purchase.

mechanic tool financing

Rates and Terms to Expect From Your Mechanic Tool Financing Agreement

Any loan approval process is a little ambiguous. Lenders are trying to get an in-depth understanding of your business with just a couple pieces of paper and a credit report. It’s hard to know which way the minute differences will move the needle from strong approval to outright decline.

Having said that, there are general rates, terms, and payment structures you can expect from your mechanic tool financing loan:

  • Interest rate: Rates can range anywhere from the low single digits for the most eligible borrowers, up into the teens for those more at risk of default.
  • Terms: The term is where mechanic tool financing loans differ from their working capital counterparts. Typically, equipment loans run for 60 months. This allows for a much lower monthly obligation and ease on cash flow. It’s important to remember, however, that if you carry this debt for several years, it becomes more and more expensive. The more interest payments you make, the more money leaves your pockets overall.

Is Mechanic Tool Financing Right for Your Business?

If you’re overburdening your expenses on leased equipment, you’re just burning cash without any of the ownership benefits. Instead, you might want to consider a mechanic tool financing loan that lets you pay to own those expensive tools. That way, you’ll avoid the headache of coordinating a lease every day, month, or week. And, at the end of the day, you can save some money that can be repurposed elsewhere.

Another telltale sign that mechanic tool financing is a must for your business is if your mechanics are better than the tools they’re using. Tools come a dime a dozen (or sometimes more than a dime), but a great employee is difficult to come by. As the owner, it’s on you to make sure that they have what they need to succeed.

And remember that lenders want to approve you—you and your business just need to check a series of boxes to qualify. The smartest thing to do is apply, as you won’t know what your loan options are until you try.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Forest Sisk

Loan Specialst at Fundera
Forest is on the customer success team at Fundera. As a Loan Specialist, he works directly with small business owners throughout the loan process, helping them find the best financing for their companies.

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