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Heavy Equipment Financing: What to Know Before Applying

Heavy Equipment Financing: What to Know Before Applying
Lauren Ward
Lauren WardUpdated May 20, 2021
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Paying upfront for expensive heavy equipment for your company isn’t always possible and it may not be  the best way to use your cash reserves anyway. Instead, many business owners turn to heavy equipment financing to spread out the cost and make smaller payments over the term of a loan. Before you apply for a heavy equipment loan, you may want to find out what to expect from financing companies, what to watch out for, and what options are typically available.

How Does Heavy Equipment Financing Work?

When you buy heavy equipment outright, you generally have to pay out a significant amount of cash all at once. That may potentially strain your finances. If you get financing for that purchase, however, while you may need to pay a down payment upfront, the rest of your payments will be spread out over time. There can be charges (such as a loan origination fee) involved, too. 

Differences Between Heavy Equipment Financing and Leasing

Acquiring heavy equipment through financing may sound similar to leasing, since both generally require regular payments for the use of your equipment, but there are differences. Perhaps most important, when you lease vs. buy equipment, at the end of your contract you generally give back the equipment (though you may also have the option to buy it at that point). But if you get financing, when you finish making your payments, you keep the equipment. While some financing may involve an initial down payment as well as regular payments after that, leasing contracts sometimes require a larger or “balloon” payment at the end of the loan period.

Requirements for Heavy Equipment Financing

When you apply to finance heavy equipment, lenders typically look at several different factors before making a decision. In most cases, they look at the age of your business. They may have a minimum requirement, such as one year or more.Lenders may also look at your credit score to determine whether or not you qualify for financing and, if you do, what kind of rates to offer you. They could look at your personal score, your business score, or both. Before submitting a pre-approval request or loan application, find out whether you’ll be subject to a hard credit pull, since that can negatively impact your score. Another factor a potential lender may consider is your business revenue. This number may affect how much you’re allowed to borrow for heavy equipment.Finally, lenders may take into account your down payment and any collateral you hope to use to secure the loan. A larger down payment may make up for a lower credit score, since it means that if you defaulted, the lender would have less money to recoup. The heavy equipment itself may also be used as collateral. If you stop making payments, the lender can simply take back the equipment. 

Types of Heavy Equipment

There are a number of types of heavy equipment you can finance, including industrial equipment and construction equipment.  Heavy equipment financing includes different machines than more general equipment financing, which can include office technology or restaurant equipment. Machinery that generally qualifies for heavy equipment funding can include (though it’s not limited to):
  • Commercial vehicles 
  • Bulldozers
  • Forklifts
  • Generators
  • Farm equipment
  • Cranes
Additionally, financing is available for both new and used heavy equipment, giving you quite a bit of flexibility in the types of assets you can fund. 

Applying for Heavy Equipment Financing

Traditional banks may offer heavy equipment financing, but online heavy equipment financing companies typically have a much easier application process. You’ll probably need to gather some documents to submit. While the exact requirements vary from company to company, you can expect to include your tax returns (both business and personal), recent business bank statements, and other financial statements. Also be ready to provide details about the equipment you plan to finance, including any information or quotes you’ve received from equipment vendors.The time it takes for a company to make a decision about your heavy equipment financing is often short. Depending on how quickly the lender can collaborate with your equipment vendor, the entire process could be completed within a few business days.

Sample of Heavy Equipment Financing Companies

Many companies that offer heavy equipment financing options emphasize their flexibility and customization. As a result, it can be hard to find generic interest rates listed on their sites. However, there are other factors you can compare if you’re shopping for a small business loan. For example, these five companies (the first non-advertisement listings that came up in a Google search for “heavy equipment loans,” conducted on January 6, 2021) demonstrate a range of requirements for business owners looking for heavy equipment loans.
Business Credit ScoreName of Financing CompanyRequired Time in BusinessAdditional info required or taken into account
FICO over 620National Funding6 monthsVendor quote
Call companySmarter Finance USACall companyCall company
Call companyBank of America2+ years under existing ownership$250,000 in annual revenues
Call companyCITCall companymonthly budget and company needs

What to Watch Out For

There are a few things to be alert about when it comes to heavy equipment financing. First, to understand the total financing costs, don’t forget to compare fees and interest rates. In addition, check that the length of the loan term matches up with how long you anticipate using the equipment. If you expect to upgrade to newer equipment before your loan term ends, it might make sense to lease instead. 

Tax Implications of Heavy Equipment Financing

Tax law is complicated and it can be confusing to figure out if you’re eligible to take advantage of the different options, so it’s always a good idea to consult with a tax professional if any of these strategies interest you. That said, if you are eligible, financing heavy equipment may provide some tax benefits to help offset the costs involved.The first possible IRS tax benefit is Section 179, which lets you opt to deduct the entire cost of the equipment the year you actually acquire it. The alternative is to depreciate the equipment’s cost each year.If you don’t choose to use Section 179, you can instead take any business loan interest or lease payment as a business tax deduction. There are rules to follow, as outlined by the SBA, and this may be another area in which a tax professional can help you make the best choice for your business.  

Options for Bad Credit

Qualifying for heavy equipment financing with bad credit isn’t impossible, particularly because the loan has a hard asset tied to it. Demonstrating that your business revenue is large may help overcome a lower credit score on your application, since good cash flow suggests you will be able to repay the loan. Every lender is different and has its own preferences, but you might also consider making a down payment, or, if that’s already built into your financing, a larger one than the lender requires. Since a down payment means you’re essentially paying for some of the cost upfront, it shows that you’re invested in making your payments on time — otherwise, if you defaulted, you’d lose that cash, in addition to the equipment. Another option is to consider leasing instead of financing your equipment. 

Finding Heavy Equipment Financing Options

Heavy equipment financing can be a convenient way to grow your business without depleting your cash reserves. While you’ll pay interest on the amount you borrow, you can spread out payments over a manageable period of time, rather than paying an upfront lump sum that could be hard to afford.If you're interested in exploring your business financing options, Lantern by SoFi can help. With our online lending marketplace, you can access multiple small business loan offers matched to your needs and qualifications with just one application.

Frequently Asked Questions

Who finances industrial equipment?
What is a heavy equipment loan?
What's the difference between equipment leasing and equipment finance?
How does financing construction equipment work?
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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