09 Sep 7 Ways to Get Equipment Financing with Bad Credit
Equipment financing with bad credit can feel like deciding to cook spaghetti and meatballs for dinner, only to run out of pasta. You can’t make that classic dish without half of the key ingredients. And when you’re hungry and frustrated, it can feel easier to give up eating altogether.
But a spaghetti-devoid pantry doesn’t have to be the end of your home-cooked meal. Add a little creativity to your meatball ingredients to make taco salad. Or follow a new recipe to make Korean-style meatballs with ginger rice. It’s not the traditional dinner you originally planned, but you can still enjoy a delicious meal.
Equipment financing with bad credit requires the same kind of adaptability and prioritization. You may not be able to secure an equipment loan at the lowest rates from your traditional banker. Your business doesn’t have the ingredients to pull that off. But a specific loan isn’t your goal. Your priority is upgrading your bakery appliances, expanding your salon, or launching your construction company.
When you adapt your plan, you can secure equipment financing with less than ideal credit history. Let’s break down the recipe for securing equipment financing with bad credit into seven strategies.
1. Work with Alternative Business Lenders
Traditional banks are strict about credit scores for business loans, like the people who cancel dinner without the right ingredients. Alternative business lenders and online financiers have developed a more flexible approach. They offer a range of equipment financing options tailored for fast and accommodating approvals.
Alternative lenders focus more on the health of your business and give your credit score less attention. You could secure financing for your equipment from nontraditional financiers if you have strong cash flow, consistent revenue, or a history of steady payments for the last three to nine months.
Shop providers and loan options for the most affordable terms. Because these companies have less strict requirements, they usually charge higher interest rates than banks. It can be worth paying the higher cost if it gives you access to the equipment your business needs to function.
2. Make a Strong Down Payment
Money talks, and a sizable down payment can shout louder than your credit score. Equipment finance lenders see you as less of a risk when you put your cash into the equipment loan. Make a down payment of at least 10% to 30% to make a strong case for yourself.
A down payment is essential for expensive machinery or specialized tools. Lenders face more risk for financing unusual or costly equipment. Lowering the loan amount with a down payment reduces the lender’s exposure, making them more willing to extend credit, even if your score is on the low side.
Say you want to invest in a PET scanner to improve imaging services at your medical clinic, but your 600 credit score is putting off your lender. A substantial down payment, like $50,000 to $75,000 upfront on the $250,000 medical device, can tip the scales for your approval.
3. Provide Collateral
If your equipment financing goes sideways, offering collateral can give your lender a tangible safety net. If you are short on cash to make a substantial down payment, using your real estate, inventory, accounts receivable, or other valuable equipment is another way to invest in the deal.
Most equipment loans are “self-collateralizing,” meaning the machinery you finance serves as security. Offer additional collateral to improve your chances of approval and secure better terms.
Maybe your restaurant’s credit score is especially low, like between 400 and 500. Even with your new oven acting as collateral, offering you a loan could seem risky. If you also offer your kitchen’s deep fryer or walk-in refrigerator as collateral, you provide a more attractive backup plan for your lender and get closer to your necessary equipment.
4. Use a Co-Signer
When your credit is low, you can get a leg up from someone with a higher score. A co-signer agrees to share responsibility for the loan, significantly decreasing the lender’s risk. Family members, investors, mentors, or business partners are all valid options as co-signers.
Make sure you discuss the investment risks with your guarantor before they sign. Co-signing is a serious commitment. If you miss payments, the responsibility shifts to the other person on the loan. Avoid straining your personal or professional relationships with a solid plan for repayment and transparent communication during the life of the loan.
5. Start with Equipment Leasing
Equipment leasing is a less risky way to finance and acquire the necessary tools when a loan seems out of reach. Because the leasing companies retain ownership of the asset until you complete the terms, these arrangements are often accessible to businesses with bad credit.
Consider leasing as a stepping stone. You can use the equipment to continue your business while building a better credit history. Nonbank financing offers flexible terms to regularly upgrade your technology or work toward machinery ownership. Equipment leasing gives your lender security and you an opportunity.
Say you’re running a landscaping business that needs a new ride-on mower. You don’t have the cash to buy it or the credit score to secure a loan. Instead, you lease it over 24 months with the option to purchase it at the end. You stay operational, meet client commitments, gradually improve your credit score, and have the opportunity to own the mower in the end.
6. Clean Up Your Financials
If you are trying to turn a few ingredients into a delicious meal, you can rely on spices and seasonings to carry it off. When your credit score is weak, you need strong financials in other aspects of your business to secure financing. Lenders look for clear evidence of your stability, consistency, and reliability in your bank statements, profit and loss statements, balance sheets, tax returns, and cash flow statements.
Taking small steps to clean up your financials can have a powerful impact on financing approvals. To show your reliability, set up consistent payment systems in your business, like autopay for insurance or vendor payments on the first Friday of every month. Separate and label your business transactions for clarity on your bank statements. Cut any unnecessary expenses to improve your cash flow.
Every equipment loan and lease agreement will require financial documentation as part of the approval process. Send in the information with your eyes wide open, like tasting your dish before you serve it to your friends. Review the documents with an accountant or financial advisor before you apply. They can help you find areas for improvement, organize the information for clarity, and present a strong financial picture.
7. Prepare a Solid Business Plan
Lenders don’t always require a business plan for equipment financing. But if your credit score is working against you, then showing a lender the business behind the number can work in your favor. It’s like convincing a picky dinner guest to try your new creation by showing them the recipe, describing the ingredients, detailing the cooking process, and proving you’ve tasted it. The more transparent and organized you are, the more confidence you inspire.
A solid business plan highlights your current financial strengths, explains how you’ll use the equipment, breaks down the loan request, details a repayment plan, and projects revenue and growth. It shows that you understand your business, market, equipment, and financing.
Show lenders that you’ve learned from past financial setbacks by explaining blips on your credit report. You may have had a medical emergency or supply chain issues that led to missed payments on past financing. Provide context about the past and a clear plan for the future. Your transparency can only improve your chances.
Adapt to Move Forward
Your financial history or the pantry’s contents may not be perfect for what you have planned, but a single rough moment doesn’t have to define your future. You may love the Korean-style meatballs enough to add them to your weekly dishes. Exploring alternative lenders may lead to debt refinancing and a strong credit history. You’ll never know if you give up.
Start evaluating your options and adjusting your plan today. With the recipe for equipment financing and some flexibility, you can secure the necessary funds and tools to keep your business competitive.
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Infographic
Securing equipment financing with bad credit can be frustrating, but it’s achievable with a strategic approach that suits your situation. Continue reading this infographic to discover seven ways to finance equipment despite having bad credit.
