With construction demand growing steadily, the amount of people we talk to who need to finance construction equipment such as backhoes is growing as well.
The vast majority of companies purchasing construction equipment will end up financing, and many will look to equipment leasing companies to enable those transactions.
If you're looking into backhoe leasing, your first and most important question will be in figuring out what your actual payments are.
Knowing your payment is crucial, because in planning your backhoe purchase, you need to know:
- Will you be able to afford the monthly payments?
- With your expected monthly payments, will you generate enough profit
Let's talk about qualifying, and then we'll go over the costs to actually finance your backhoe purchase.
Will You Qualify to Lease a Backhoe?
In most cases, there will be a way to find financing for your backhoe. This is true for financing most types of hard assets.
If you're buying a new backhoe from an equipment dealer, many times you will be able to line up very low-rate financing if you've been in business for over two years and have very good credit.
If you're not buying new equipment, have less than stellar credit, or if your business is less than two years old, you will typically use an equipment leasing broker to finance the purchase.
What will it take to qualify?
If you have 2 or more years in business:
- With good credit, 640+, you'll probably qualify. Sometimes with zero down.
- With fair credit, 600-639, you'll usually need first payment upfront
- With poor credit, under 600, it depends on your business situation, but if your revenues are strong, you may need 10-20% to put down. For really bad credit, you may need collateral or a large down.
For businesses less than two years old:
- With good credit 660+, you'll usually just need first and last payment in advance
- With fair credit, programs vary, but can include security deposits and/or some collateral.
- New businesses with credit scores under 600 will be required to come up with a 50% security deposit or collateral
What will Payments Be on a Backhoe?
Your payment structure for backhoe leasing depends on a number of factors, including your time in business, how good your credit is, how long you lease the equipment for, and whether you lease with a $1 residual (meaning you own the equipment at the end) or a real residual (meaning you can give the equipment back at the end or keep it for a predetermined amount, typically 10%).
Let's look at what payments would be (approximately, a lot of factors go into determining payments, but these will be in the ballpark) if you have been in business a while. We'll assume you are buying a $25,000 backhoe and will own it at the end with a 10% residual ($2,500).
Two things to note: with poor credit, these are sometimes the rates, but it really depends on the situation and how much risk the lender is exposed to. With really poor credit the rates could sometimes be higher than this.
Also important, you may notice a big jump in the difference between the rates for good credit and bad credit borrowers, around 50% and sometimes more. Be especially wary of online calculators with fake low rates. If you see an equipment leasing company quoting one rate or a range that is very "tight" they are probably not very trustworthy.
Backhoe Leasing Rates for Start-Ups
If you're new in business, rates will be higher than for an existing business with the same credit profile.
This makes sense, because not only is it riskier to lend to a new business than to an existing business, but an underwriter looking at a business with an operating history has some numbers to chew on, but looking at a new business the only thing to really underwrite is your creditworthiness on a personal level.
Here are numbers for a new business looking at the exact same $25,000 backhoe:
Customers with bad credit often provide feedback that the rates sound ridiculous. That's why most lenders don't put the real rates on their websites - they hope that they'll get you pretty deep in the process before they spring the real rates on you.
That's a rotten way to do business, so let's be clear and transparent about what the rates really are.
Are the rates high?
There's a good reason for that.
When a new business owner has bad credit and wants to finance equipment, a lender has to factor in:
- 50% of new businesses fail
- 25% of business owners with bad credit will default
- The default risk of a new business owner with bad credit is about 63%
The only way a lender offering loans to owners of startups can stay in business is to charge rates commensurate with the amount of risk in the transaction. The real question, then isn't are the rates high, but when does it make sense to pay rates that are high?
When is it OK to Pay High Rates to Lease Equipment?
If you've been following the news lately, you've no doubt seen mention of the fast food workers crying that they are "entitled" to earn $15 an hour.
Let's say you own a burger stand and pay the people that flip meat minimum wage.
The question isn't what people with no skills think their time should be worth, but rather whether you could just replace them with different people with no skills for what you're willing to pay.
If you can just fire them and get new unskilled workers for $8 a hour, that's certainly what you should do.
Similarly, if you've got bad credit and don't like the rates you are offered for equipment financing, there are two questions you need to answer:
- Do you have the option to get the equipment financed for cheaper?
- Will the cash flow you generate from use of that equipment be high enough to justify a high rate for financing?
If you can get the equipment financed for cheaper, that's certainly what you should do - but if you can't, it really comes down to whether or not you can make enough money using that equipment that the rates don't matter.
If your expected cash flow from use of the equipment isn't enough to justify the rates you are offered, it's sometimes better to hold off on your equipment purchase.
Ready to Lease or Finance a Backhoe? Give us a call at 866-631-9666 or click below to get started.