Heavy Equipment Financing: The Ultimate Guide

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Heavy Equipment Financing: Everything to Know Before You Apply

Heavy equipment financing—also known as construction equipment financing—allows you to get a business loan or lease to purchase construction equipment for your business so that you don’t have to purchase the equipment outright. The construction equipment can be new or used, but in either case, the equipment purchased with the financing serves as collateral for the financing.

Heavy-duty equipment is usually synonymous with construction equipment and refers to any equipment that can move earth, perform construction, or perform another equally heavy-duty function. Heavy-duty construction equipment tends to encompass bulldozers, engineering equipment, forklifts, tractors, and excavators.

Even if you have the money to pay for the construction equipment you need, it may be wise to opt for heavy construction equipment financing in order to dedicate your cash flow to more valuable channels. Read on to learn about how to qualify for this type of financing, as well as the cost and terms of heavy equipment financing.

In this guide, you’ll find:

Heavy Equipment Financing: The Fundamentals

A common misconception about heavy equipment financing is that it’s the same as equipment financing. While equipment financing tends to be used for items such as file cabinets, computers, and desks, heavy equipment financing needs to be used for larger pieces of machinery, such as the ones we previously mentioned.

Again, heavy equipment means equipment that performs heavy-duty functions. These pieces of equipment can be expensive, and heavy equipment loans allow you to purchase the equipment without paying upfront.

As someone in the construction industry, you’ve probably found yourself in need of heavy-duty construction equipment like bulldozers and forklifts. Having the right equipment at the right time can help you finish a project on time, allow you to cut back on staffing, and lower your costs. All of this makes for a satisfied customer and more contracts down the line.

But the price tag on heavy equipment can be daunting for even the biggest businesses out there, and if you’re a small business, securing machinery is even harder. Construction equipment financing is ideal for businesses that need to get new equipment but can’t afford—or don’t want to make—payment in full.

How to Qualify for Heavy Equipment Loans

Now that you understand different lenders’ qualification standards for heavy equipment financing, let’s zoom out and get a more generalized idea of what it takes to qualify for heavy equipment financing. Just like any other type of business loan, heavy equipment financing is only available to business owners who meet certain standards.

Fortunately, the bar isn’t very high to qualify for heavy equipment loans. There are generally three routes to qualifying for construction equipment financing.

Let’s take a look at them.

1. Credit Score

If you have a credit score above 600 and have been in business for at least one year, you’ll probably be able to qualify for heavy equipment financing.

2. Cash Flow

If your credit isn’t great, but your business revenues are high (relative to the cost of the equipment), you can qualify for construction equipment financing on the basis of your cash flow.

3. Down Payment

Even if you have poor credit and only mediocre business revenues, you can qualify for heavy equipment financing by offering a down payment. For instance, if you want to purchase equipment that’s worth $25,000, and can bring $5,000 to the table, that can help you qualify for construction equipment financing.

The good thing about construction business loans is their flexibility. A lender will usually be able to offer you financing unless you have an open bankruptcy or child support collections. Just keep in mind that your interest rate will reflect how strong you are as a borrower. If you have poor credit, for instance, you might qualify based on other extenuating factors but will have to pay a higher interest rate because you are considered riskier to lend to.

Heavy Equipment Financing for Bad Credit

Borrowers with bad credit have a better chance of being approved for a heavy equipment loan than other types of financing. Because heavy equipment loans are collateralized by the equipment they finance, this makes them less risky for lenders. In the event that you default on the loan, the lender can seize and liquidate the equipment to recoup their losses.

As such, bad credit isn’t a deal-breaker in the loan approval process. If a borrower has bad credit but can prove healthy revenue or are able to offer a down payment on the equipment, they will likely still receive funding. 

However, even though you may still be approved with bad credit, you will likely face higher interest rates than borrowers with good or excellent credit. If you’re able to wait on funding, you may consider building your credit score before applying in order to receive the most favorable terms.

Leasing vs. Financing Heavy Construction Equipment

One important thing you’ll have to decide is whether to get a lease or a loan for your heavy equipment. A lease is similar to equipment rental. You basically pay a certain amount of money each month for the right to use the equipment. At the end of the lease term, you either return the equipment to the vendor or purchase the equipment.

The purchase price depends on the type of lease you have, but unless you purchase the equipment at that time, you will not become the owner. With some kinds of leases, the equipment doesn’t even show up on your balance sheet. A loan, in contrast, effectively makes you the owner of the equipment, and the equipment will show up on your balance sheet. You make monthly payments, and at the end of the loan term, you are the outright owner of the equipment.

Leases are popular with equipment that becomes outdated quickly, when the business owner is sure they will need to upgrade at the end of the lease term. But heavy-duty construction equipment can last thousands of hours of work, so a loan might be a more cost-effective route. At the end of the term, you’re the owner of the equipment and don’t have to worry about upgrading.

It’s a common perception that leasing is cheaper than buying, but this is not always the case. Be sure to check prices and do the proper calculations beforehand to see which option is best.

Costs and Terms

If you qualify for a heavy equipment loan, you’ll be wondering what it means in practice for your business. Fortunately, the cost and terms on heavy equipment loans are pretty favorable because the equipment serves as collateral. If you default on the loan, the lender can seize and sell off the equipment to satisfy the debt. Since the lender has that security, they tend to provide favorable terms.

Here are the typical terms of construction equipment financing.

Financing Amounts

With heavy equipment financing, you’ll be able to fund up to 100% of the price of the equipment you’re hoping to buy for your business. The key words here are “up to”—100% financing is generally reserved for the best borrowers.

If you have low credit, low revenue, low cash reserves, or an older piece of equipment, then you’ll likely need to bring some down payment to the table. Your specific percentage will depend on the quality of equipment you’re hoping to buy and your own credit score, but if the conditions are right, then you could potentially finance the entire cost of the machinery your business needs.

Repayment Term Lengths

The repayment term length on your heavy equipment financing will also depend on the nature of the equipment you’re hoping to buy—you’ll typically repay your heavy equipment financing over the projected life of the equipment in question. The term of the loan generally won’t exceed the useful life of the equipment.

Interest Rates

Because your construction equipment secures the loan, the lender takes on less risk. If you’re unable to pay back your loan, the lender will simply seize the piece of equipment.

Since the risk for the lender is lower, you’ll be able to access relatively low interest rates for heavy equipment financing. Generally speaking, heavy equipment financing will have interest rates as low as 8% or as high as 30%. A word of warning: You may see rates advertised as low as 5% to 6%, but it’s a rare occurrence that you’d actually be able to secure a loan at those rates.

Your credit score, time in business, business revenue, condition of the equipment, and down payment will all affect your interest rate. The stronger your credit and business revenue, the lower your interest rate will be. The cost of the equipment also has an impact—lower-cost equipment tends to have slightly higher interest rates.

Funding Speed

Construction equipment financing doesn’t have as rigid of an underwriting process compared to unsecured loans. As such, you’ll be able to get funding with this type of business loan in as little as two business days. However, there is an extra party in the mix here—the vendor that you’re purchasing the equipment from. You’ll want to make sure you have a quote or invoice from the vendor and that they can move quickly to get the equipment into your hands once you have the funds from the lender.

Check Your Equipment Financing Options

What You'll Need to Apply

Do you and your business check off all of the required boxes to be eligible for heavy equipment financing? Great! The next step you’ll need to take is compiling all of the necessary paperwork and loan requirements before diving into the application process.

For heavy equipment financing loans, these are the documents you’ll need to have to apply:

  • Driver’s license
  • Voided business check
  • Financial statements (showing revenue, expenses, and profits)
  • Recent bank statements
  • Business and personal tax returns
  • Equipment quote or invoice from vendor

The amount of paperwork you have to submit will depend on which lender you work with. For instance, a bank will require a ton of paperwork, but an online lender will require minimal documentation. At the same time, a bank will likely offer a better interest rate than an online lender, so there’s a tradeoff among time, cost, and effort.

Heavy Equipment Financing Tax Benefits

You’ll be happy to know that there are several tax benefits to financing heavy equipment. The government incentivizes entrepreneurs to borrow or lease the tools they need to start and grow their companies.

Here are some of the tax benefits of financing heavy equipment.

    Section 179

    This allows businesses that finance or lease equipment to deduct the full cost of equipment up to $1 million in the year of purchase. The advantage of Section 179 is that you don’t have to depreciate the cost of the equipment year over year. Instead, you get the tax savings all at once.

    Interest Expense/Lease Payments

    If you don’t take advantage of Section 179 (because you don’t qualify or because your tax professional advises you against it), you can write off loan interest or lease payments as business expenses on your tax return.

    Depreciation

    The last option is to depreciate your construction equipment every year and enjoy a small tax deduction over the useful life of the equipment.

    You can deduct a portion of the cost of business property by claiming a depreciation deduction via IRS Form 4562.

    We recommend talking with a tax professional to make sure you’re taking full advantage of the tax benefits of heavy equipment loans.

Where to Get Heavy Equipment Financing

Now that you know what heavy equipment financing is, let’s explore some of the top lenders that you should consider using for these types of loans.

You should also know that bank funding might be an option: Wells Fargo, Chase, Bank of America, and smaller local banks all offer financing for construction equipment. If you can qualify for a bank heavy equipment loan, that is likely your best option, as banks offer the most affordable capital and the longest terms.

If bank lending isn’t an option for you, here are some top online lenders for heavy equipment financing.

1. Direct Capital

Direct Capital is an online lender that offers equipment financing of up to $500,000, term lengths ranging from six months to six years, and interest rates as low as 5.49%.

They offer both loans and leases and can work with your business to figure out a monthly, seasonal, or deferred payment schedule And if you need funding fast, Direct Capital can get you funded with heavy equipment financing as quickly as one day.

2. Funding Circle

If you need money to buy a big-ticket piece of equipment, then Funding Circle can offer heavy equipment financing from $25,000 to $500,000, repayment terms from six months to five years, and interest rates starting as low as 4.99%.

Funding Circle’s average time to funding is one week. And to qualify, you need at least two years in business, a minimum personal credit score of 620, and $150,000 in annual revenues.

3. Balboa Capital

The Balboa Capital heavy equipment financing program offers funding of up to $1 million with terms ranging from two to five years.

You need at least $300,000 in revenue and one year in business to be eligible for this program, and if you qualify, you’ll be able to spend the proceeds on any business equipment you need.

4. eLease

Another top equipment financing lender is eLease Capital, which has very few minimum requirements and restrictions, so if you’re working with a limiting factor—like lower annual revenue or a high desired loan amount—then eLease Capital might be the best option for you.

Heavy equipment loan amounts through eLease range from $3,000 to $500,000 on two- to five-year repayment terms. A personal credit score above 600 is preferred, but a lower credit score won’t necessarily disqualify you. Depending on your creditworthiness, interest rates range from 6% to 35%.

5. Crest Capital

Finally, we have Crest Capital, which offers heavy equipment financing loans between $5,000 and $500,000 on two to seven-year terms with interest rates starting at 5%.

To qualify, Crest will want to see a minimum credit score of 650 and at least two years of business history.

Compare Your Equipment Loan Options

Alternatives to Heavy Equipment Financing

Heavy equipment financing is a great way to purchase a large piece of equipment you need for your business. That being said, there are alternative routes you can go—especially if you’re a highly qualified borrower. Let’s take a look at these alternatives.

SBA CDC/504 Loan

If you’re a highly qualified borrower looking for the best possible terms on heavy equipment financing, we recommend going with an SBA loan. SBA loans are business loans guaranteed by the Small Business Administration. There are multiple SBA funding programs, and for those looking for heavy equipment financing, we recommend going with an SBA CDC/504 loan.

A CDC/504 loan is used to purchase major fixed assets—mostly large equipment and commercial real estate. When you take out a 504 loan, roughly half will be provided by a bank and guaranteed by the SBA. The rest will be secured through an SBA-approved certified development company (CDC). You’ll also likely have to put down a down payment of about 10%.

In order to qualify for a 504 loan, you’ll need to meet the following requirements:

  • A minimum personal credit score of 650
  • Meet the SBA’s size standards for small business, which differ based on industry
  • Have a tangible net worth of no more than $15 million and an average net income of $5 million or less after federal income taxes for the two years prior to application
  • Meet owner-occupancy requirements
  • Create or retain jobs or promote other public policy goals with your project
  • Operate for profit and not be in a passive industry, such as real estate investing

The total possible funding amount from a 504 loan is $20 million with 10- to 25-year repayment terms and interest rates ranging from 10% to 20%.

Long-Term Loan

Another viable option if you’re unable to qualify for a 504 loan is a long-term loan. As the name suggests, long-term loans are loans that you repay over a period of one year or longer, usually in monthly installments. Those who qualify for a long-term loan generally get low interest rates, making this another good option if you’re looking to finance heavy equipment.

Long-term loan amounts won’t provide as much funding as a 504 loan, but you can still secure loan amounts up to $250,000 on terms as long as 25 years. Your interest rates can range from 4% to 30%, depending on how qualified you are.

In order to qualify for a long-term loan, you’ll need to meet some pretty high standards—especially if you’re going through a bank. Most borrowers who qualify for long-term financing from a bank have a credit score of at least 620 and a profitable business. With an online lender, you may be able to qualify with a lower credit score and less time in business.

Heavy Equipment Financing FAQs

The Bottom Line

There you have it—all the information you need to navigate heavy equipment financing, compiled into one ultimate guide. Start by finding the right construction equipment, and then you can start shopping around for the best lender and the best terms for your construction equipment financing. Your hard work will ensure that you’re able to invest in the right equipment for your business.

See Your Equipment Financing Options
Vice President and Founding Editor at Fundera

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. She launched the Fundera Ledger in 2014 and has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending. She is a monthly columnist for AllBusiness, and her advice has appeared in the SBA, SCORE, Yahoo, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, StartupNation, and more. Email: meredith@fundera.com.
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