Businesses that rely on heavy equipment to carry out their day-to-day operations face some serious costs with regards to acquiring, upgrading, or replacing their equipment. These large machines can be challenging to finance out of pocket, as well as if you're able to, it might not be probably the most pragmatic method of doing so.
Below, we’ll dive into some of the heavy equipment financing basics and cover what you should know about small company heavy equipment loans and leases.
What Is Heavy Equipment Financing?
Heavy equipment financing includes loans and leases accustomed to acquire specialized vehicles, for example dump trucks, backhoes, and bulldozers, which are used in construction, excavation, or timber projects.
There are some new ways to start financing heavy equipment, based on whether you’d would rather own the heavy equipment or just operate it for any set period. Each one has its advantages and disadvantages.
What Is Heavy Equipment?
While the saying “heavy equipment” is frequently associated with construction projects, it features a wide selection of specialized vehicles controlled by licensed operators. Common examples of heavy equipment include:
- Tractors
- Dump trucks
- Street sweepers
- Pile drivers
- Backhoes
- Forklifts
- Cranes
- Tunnel boring machines
Heavy Equipment Loans VS Leases
The most commons types of heavy equipment financing are loans and leases. Instantly, they share lots of traits in keeping: term lengths, rates of interest, monthly obligations. They are doing, however, have different rationales and rules governing them.
An equipment loan is a term loan used, as you might guess, to buy equipment. Most equipment loans last between three to seven years, with some lasting as long as 10. Generally, you’ll be anticipated to make a deposit of around 15% from the cost of the gear. Relative to leases, loans usually have better rates but cover an inferior percentage of the total costs.
An equipment lease is used to purchase or rent equipment. Leases themselves fall under two broad categories: capital leases and operating leases.
Capital leases are utilized to buy equipment and serve most of the same functions as an equipment loan. They don’t typically need a deposit and often cover 100% of the costs, with terms typically which range from three to five years. Heavy equipment capital leases frequently are available in the form of $1 buyout leases or 10% purchase option leases (10% PUT). Which means that, at the end of your leasing term, you’ll can buy your equipment for that amount specified: $1 when it comes to $1 buyouts, and 10% of the equipment’s cost for any 10% PUT. Why so low? Well, a capital lease assumes you’re going to buy the gear. Actually, the gear is considered an asset for tax purposes. Capital leases work for equipment that doesn’t go obsolete quickly and slowly depreciates.
Operating leases act like capital leases however with several key differences. Operating leases are often for a shorter period, generally two years or less. After the leasing term, you’ll can purchase the equipment (typically for fair market price, and that's why you’ll sometimes see these leases called fair market value leases), give it back, or renew your lease. With respect to the exact terms of your lease, it might count being an asset or a business expense.
How Heavy Equipment Loans & Leases Work
Heavy equipment loans and leases both work just a little differently. When i described above, both feature monthly installment payments and interest. Where loans have deposit, that are paid at the beginning of the borrowed funds, leases have residuals, that are paid at the end of the lease. Both residuals and deposit can differ based upon the kind of agreement you sign with your financer. When it comes to residuals, they might be optional if you choose to return your equipment or renew your lease.
Note that heavy equipment loans and leases aren’t substantially diverse from other kinds of equipment financing. The main difference is that you’re coping with more specialized and dear equipment than most other industries. Which means you’ll have to work with a funder who is ready to extend both of you how much money you need to get the equipment and a suitable amount of time to pay for it off if you’re buying it.
Used VS New Equipment
Depending around the kind of heavy equipment you’re looking for, you may have the option to finance used equipment as well as new. Used equipment can frequently fall under the hands of apparatus lessors (companies offering leases) when the equipment is returned for them rather than purchased. These companies should provide operating leases for businesses who will make use of the equipment for a small amount of time and then return it.
If you’re looking to buy used heavy equipment from a third party, and also you need financing, make certain your financer can work with the reseller under consideration.
Expected Terms & Fees
Generally speaking, the term length of your heavy equipment loan or lease depends on two factors: whether you’re renting or buying, and just how long the useful life of the equipment is. It’s rare for a financial loan or lease to possess a term length that’s more than the equipment’s expected useful lifespan. In practice, you’re probably taking a look at somewhere around the five-year mark for many heavy equipment financing.
Interest rates on loans and leases can and do vary widely, depending on your financer and your fitness like a borrower/lessee. Rates of interest for heavy equipment usually begin in our prime single digits, using the ceiling somewhere just short of 30%.
Loans and leases may also come with all manner of supplemental fees, or none whatsoever. If you're able to help it to, you should always attempt to deal with financers who will ask you for minimal quantity of these fees as possible. A standard fee for a loan is the origination fee. It is really an amount deducted in the money you obtain from your loan rather than a fee you pay directly. Leases, on the other hand, sometimes have administration fees that are charged to “keep your account active.” These may be annual or month-to-month.
Additionally, you will probably pay late fees should you fall behind in your payments.
What About Collateral?
So that multiton vehicle you’re financing? It’s worth quite a bit, and your financer will either possess a lien onto it or own the title into it, with respect to the kind of financing you obtain. The good thing regarding equipment financing would be that the equipment you’re financing is the collateral. If you default in your loan or lease, the financer can simply repossess the equipment.
That said, for those who have particularly bad credit, you may also need to make a larger loan deposit or pay a month of your lease in advance.
How The Application Process Works
With any kind of equipment financing, it’s often a good idea to have the specific brand name of equipment in addition to a vendor/seller in mind before you apply to help expedite the process.
If you’re going through a bank, bank, or captive lessor, you’ll probably need to apply on-site. Online financers, as you may expect, will generally offer the ability to apply through their websites. Both entities will be looking for the next information:
- Time Running a business: Has your business been around of sufficient length to be stable?
- Personal Credit Score: How your main credit are you currently using, and do you have a good reputation for repaying it on time?
- Debt-To-Revenue Ratios: Are you likely to have the resources so that you can pay the loan and lease?
Your financer will attempt to ascertain all of the above by asking for corroborating documents. You can save yourself some time and grief with these documents available when you apply:
- Personal identification/driver’s license
- Three to 6 months of bank statements
- Tax returns/financial statements
- A quote from your equipment vendor
Some financers may request more information.
After you’ve submitted your information, the financer will consider the application and likely perform a soft or hard pull on your credit. Equipment financing tends to be on the quicker side as bank financing goes, however with more substantial investments such as heavy equipment, you may be taking a look at a lead time so long as weeks to a month or two. If you go with an online lender, the process is going to be considerably faster — usually measured in days — though you’ll probably end up with a higher rate than you'd by going through a bank.
If you’re approved, the financer will often directly pay the vendor, though, in certain less frequent cases, you might get the money directly to purchase the equipment.
Are You Qualified For Heavy Equipment Financing & Could it be Suitable for Your company?
Heavy equipment isn’t cheap. Even with generous financing, you’re looking at a significant financial burden. Think about the investment you’re making and also to what degree it'll directly bring about your revenue. Does it make more sense to book or to own?
To qualify for heavy equipment financing, you’ll wish to have a credit score of at least 620, preferably higher. Leases, which don’t involve down payments, will often have a higher credit requirement than the usual comparable loan. Having said that, don’t assume that you can’t get financing even when your credit is under 620; there may be high-risk lenders willing to use you…for any price.
Is Heavy Equipment Financing Not Right For You? Your Other Options
Do you'll still need heavy equipment, but don’t think huge equipment loan or lease can get you there? Check our listing of top equipment financers to make sure. Should you don’t find what you’re searching for there, you still have other options.
Since you’re dealing with expensive items with long utility lifespans, you may want to consider other sorts of long-term loans. Particularly, SBA 7(a) and 504 loans can provide the high borrowing amounts and long term lengths you'll need. Both may be used to purchase equipment.
Looking to finance other kinds of equipment and landing here accidentally? Maybe you’re seeking to finance laundromat equipment or tech equipment?
