5 Questions About Heavy Equipment Financing

If you’re purchasing heavy construction equipment this year, you may have some questions about financing your new machine. Let’s break down your options and look at the advantages of each.

An equipment lease or loan allows you to borrow money for equipment purchases and make scheduled payments instead of paying upfront, helping to free up cash you can spend on your business. If you’re considering equipment financing, examine these five common questions to learn more.

1. How does a lease differ from a loan?

The two most common options for construction equipment financing are leasing and borrowing money. With a lease, you normally make a smaller monthly payment for a set period, and you have the option to purchase the machine at the end of your lease term. With a loan, you borrow money upfront to make monthly payments for the purchase, and you own the equipment at the end of the loan term. Typically, equipment loans have higher repayment plans than leases. You may be able to lower the monthly lease or loan payments by making a larger down payment on new equipment.

If you need a machine for a short-term project or seasonal work, leasing may make more sense. A lease may also be beneficial if you are working in aggressive environments such as demolition where your equipment needs to be replaced more often. But if you prefer to keep equipment longer and it’s fundamental to your daily operations, an equipment loan may make more financial sense.

A financing alternative to leasing or loans is a rental purchase option (RPO), which is a rental agreement that applies a percentage of your rental payment toward the purchase of equipment. At the end of your rental term, you have the option to purchase the equipment. An RPO makes sense if you are unsure how long you’ll need a machine for a project or if you are new to heavy equipment. With an RPO, you have time to see whether the machine is best for your project or business while building equity in the equipment.

2. What are the rates and terms?

Interest rates vary for equipment leases and loans, depending on your business, credit score and amount of equipment you’re purchasing. Most lenders offer unsubsidized rates and subsidized rates. Generally, unsubsidized rates (standard rates) on most equipment loan rates range from 6% to 9%.

Some lenders can offer subsidized rates of 0% financing on selected terms, so you don’t pay any interest.

Typical financing terms range from 12 months to 60 months, but a popular term for financing construction equipment is 36 months. Some manufacturers offer a 72-month term for smaller construction equipment, such as mini excavators. Make sure to choose a term based on the monthly payment you can afford. Also compare rates, terms and fees.

3. How do I apply?

The application process can vary depending on where you apply. The process usually starts with your local dealer to determine what financing or leasing options make sense.

You can visit your local financial institution; however, you may need more documentation and a higher credit score to apply.

If you finance through your dealer, employees can direct you to an online portal to apply. This is typically a one-page credit application that requests basic information about your business. You may provide personal information to provide personal guarantee on the request.

Generally, personal guarantee is recommended for a newer business. Once your dealer has all your information, a sales specialist can submit the application within 30 seconds.

4. How do I know if I qualify?

While every lender is different, it’s usually easier to qualify for an equipment loan or lease with a manufacturing lending partner. If you’ve been operating your business for a few years and have a good credit history and comparable borrowing and cash flow, you may qualify for a loan or lease at a decent rate. If you have limited credit history or cash flow, you may be able to qualify by showing your financials or offering a down payment. Your dealer may also decide to work with alternative lending partners to help you figure out financing options.

5. How do I know if I’m approved?

Once a lender receives your information, you usually find out if you’re approved within minutes. Some lenders can take 3 to 5 business days if you have existing exposure or your current request needs structuring. If you’re approved, all you need to do is sign paperwork and receive equipment delivery, and the funds will be disbursed directly to your dealership.

Financing is a great option to help ensure you have the right equipment to complete projects on schedule as well as preserve your cash. Visit with your local dealer today to start the process.

What Is Section 179?

If your business is using financing to purchase heavy construction equipment, you may be eligible for a tax write-off called Section 179 of the IRS tax code. For instance, if you financed $100,000 worth of equipment, you may be able to deduct the entire amount from your taxable income in the year it was purchased or financed. Visit with your tax adviser to learn more about Section 179.