We get a lot of inquiries about financing different types of equipment for customers who have (or, at least, think they have) bad personal credit. The challenge for small businesses looking into bad credit equipment financing is that there's quite a few ads for financing, but the vast majority tell you the positives, such as, "financing is fast and easy", while totally omitting the negatives.
When you call a lot of these companies, or fill out a form on their website, you'll speak to a fast-talking person who will try to slam you into a loan or lease as fast as he or she can - and you'll have to play detective to try to figure out whether this loan could be right for you.
Let's talk about the negatives to equipment financing when you've got bad credit, and about when financing might or might not make sense for your business situation.
Negative #1: Equipment Financing Costs With Bad Credit
Small business financing in most situations costs more than consumer lending. This is because when a consumer changes jobs or something they typically don't stop making payments on their car or their house. However, if you own a construction company, and you go out of business, which bill are you going to pay first - the house which you live in or the construction equipment you've stopped using?
Adding bad credit to the higher risk already in business lending means that the only way to lend money to business owners with bad credit is to charge rates high enough to compensate for the risk. That's a fair trade to any reasonable person, but unfortunately instead of being transparent with you, many equipment leasing companies either hide the rates or lie about them.
If you have bad credit, the rates will be high. How high depends on how bad your credit is, along with analyzing other risk factors, such as whether you have collateral, how much you do in sales and profit, and some other variables. We talk about what payments on equipment really are for different credit profiles in this article. Note that the payments quoted in that article are approximations, as every situation is different, but they aren't wild distortions like most of the payment terms quoted on equipment financing websites.
Negative #2: Lies, Damn Lies, and Working Capital Lenders
Something that has occurred recently is the phenomenon of working capital lenders claiming that their loans or advances are a better option for acquiring equipment than traditional equipment leasing. One of the reasons cited by hucksters is that with the curtailing of Section 179 (where you get to write off a big amount of an equipment purchase in the year you buy it) equipment leasing or financing is no longer the good deal it once was.
Some of the people saying this are stupid, and the rest are liars. Section 179 eligibility is not affected by whether you do an equipment loan, a working capital loan, or sell one of your kidneys on the black market to acquire the funds to purchase equipment. Here is the publication on Section 179 from the IRS, which says not one word about section 179 in relation to how funds are acquired for your equipment.
A transparent working capital lender would tell you that these loans are an option if you absolutely need the equipment and you can't qualify for any other type of loan, because in most cases, while equipment financing costs are high, rates and payments for most working capital programs are 2 to 3 times the rates of the most expensive equipment leasing products. It's unfortunate, but most don't do this.
(We can help you acquire a working capital loan for equipment, but we will only suggest it if all other options have been exhausted).
Negative #3: Qualifying for Equipment Financing with Poor Credit is Not as Easy as Advertised
Like most of the things advertised in BIG BOLD LETTERS WITH EXCLAMATION POINTS! on the internet, claims of fast easy financing is just a load of BS.
Here's what it takes to qualify for equipment leasing with bad credit:
- 640 and above credit score: (which many think of is bad, but it really isn't) - usually pretty easy. In most cases you'll need a first and last payment - if you just started your business, a security deposit may be needed.
- 595 to 639 credit score: depending on the situation, you're likely be asked for a 10% security deposit and might be asked for some collateral.
- Under 595 credit score: it depends
With credit under 595, if you've been in business for at least a year, are not looking for equipment that costs more than 10% or so of your annual sales, and do at least $350,000 a year in revenue, you can often qualify with a 10-20% security deposit.
If you're brand new with credit under 595, are a one or two-person company, or do under $350,000 a year in sales, you'll usually be asked to provide collateral (vehicles, machines or real estate) equal in value to the equipment you are acquiring to secure the transaction.
It Sounds Really Awful - When Would Equipment Financing Make Sense With Bad Credit?
If you haven't been scared away yet, it's likely you really need the equipment and want to deal with a company that will treat you fairly and not try to con you into a loan just to pad their own bank accounts. That's how we deal with our customers, and you'll be treated in the exact same transparent and fair manner when you deal with us.
With that being said, high payments on equipment when you have bad credit aren't a bad thing, because that's often the only way you can acquire the funds, but they are sometimes, as opposed to always, a good option.
The two questions to ask: how much money will flow back into your pocket from the equipment after making the payments, and is there a better use of those funds for you than buying that equipment?
If the answers to those two important questions are, "enough" and "no", there's a good chance that equipment financing might be the route to take.