The Ultimate Guide to Heavy Equipment Financing
Heavy equipment financing can be beneficial for any business in any industry. Learn about all of the perks of financing equipment.
Heavy equipment refers most commonly to construction equipment needed to move large loads. However, it can also refer to mining, lumbar, and other industries that require heavy-duty machinery to perform critical tasks. Heavy equipment is not to be confused with manufacturing equipment (from lathes to sandblasters and industrial air compressors), but specifically to machinery used in resource gathering, excavation, and construction.
Naturally, this type of equipment isn’t just substantial – it’s also quite expensive. Even smaller forklifts cost several tens of thousands of dollars, while drill rigs for land drilling can cost anywhere from 800,000 to far upwards of a million. Let’s not even get started on the equipment used in open-pit mines and rock quarries.
Businesses faced with the difficult decision to replace old equipment are looking at an enormous financial burden. One that requires a cool head and a good partner in financing.
What is Heavy Equipment Financing?
Heavy equipment financing is one of the multiple options a business can explore when purchasing new equipment. It also tends to be the wisest.
Heavy equipment is costly, and buying new equipment outright (even if it’s used) can set your company back. This might be a bad idea at any point in time, especially after coming out of a volatile pandemic market.
Financing options allow you to lease and potentially purchase heavy equipment without cutting too deeply into your working capital. This will enable you to hold onto a considerable amount of liquid assets for potential financial setbacks, or it lets you redirect your cash flow towards something else that may be much harder to finance in the same way.
Because heavy equipment is necessary for any construction work, the industry around helping businesses lease and finance it is also highly competitive and robust.
This means you’re pretty likely to get flexible financing options for a new excavator. At the same time, it might be harder to finance more specialized or niche equipment, like a fully automated asphalt paver. This allows you to seek out better financing options for most of your equipment and save the rest of your cash flow for purchases you can’t afford to be as flexible with.
When Should You Consider Heavy Equipment Financing?
Heavy equipment financing is essential when:
- You can’t afford to pay for equipment out of pocket without potentially pushing your numbers into the red. Heavy equipment costs anywhere from tens of thousands to millions of dollars. Even if your business can barely afford it, it may leave you vulnerable. This can also affect your chances of seeking other kinds of financing in the future.
- If you are new to the industry and need equipment to get started. Startup firms in the construction, mining, or lumber industries may have the capital needed to get started. Still, heavy equipment financing allows you to potentially use that capital to finance better quality equipment.
- If your credit isn’t good enough for a different kind of business loan. Some bank loans and business loans may be preferable to a heavy equipment financing plan in the long-term due to better rates – provided you qualify for them. Heavy equipment financing tends to feature a low bar when it comes to credit, and the collateral is the equipment itself.
There may be other circumstances under which you might want to consider heavy equipment financing over other financial options – walk through it with your financial expert today.
How Do You Qualify?
As with any financing or loan, there are specific qualifications you need to fulfill to apply for heavy equipment financing successfully. Most plans are amended to reflect your current company history, age, and credit score.
The better your credit score, and the older your company, the better your rates. Concurrently, lousy credit scores and a lack of history means a higher upfront and total cost.
That being said, the bar to qualify for heavy equipment financing is relatively low in comparison to many other loans and financing options. If you have a credit score of at least 600 and have been in business for at least a year, you will probably have no problem qualifying for heavy equipment financing.
What If You Have Bad Credit?
If your score is lower, or if your company is younger, you may have some trouble applying for better financing options but might still land a heavy equipment loan based on your cash flow. If your company is young, and your credit score is poor, but you’re doing well (relative to the value of the equipment), you might be able to use that to leverage better financing.
Another option is to consider a down payment. Many financing companies advertise heavy equipment financing options without the need for any down payment and very competitive rates – provided you have the kind of financial health needed for a financer to justify that offer. In general, things like cash flow, down payments, and higher rates will help you qualify for equipment. In the end, companies with bad credit can still negotiate a loan wherein the equipment itself serves as the collateral.
Heavy Equipment Financing vs. Leasing
The main difference between financing heavy equipment and leasing is whether you end up owning the equipment in the end. With heavy equipment financing, you end up outright buying the equipment. This is great for any piece of equipment that will last you several years longer than the lifetime of your loan.
But in industries where equipment needs to be regularly updated or meant to be used for 5-10 years before it tends to break down, a leasing option may be more financially attractive.
Leases tend to be cheaper with the caveat that you don’t end up owning the equipment. Some leases do offer a buyout option, so you can pay the final 10 percent of the value of the equipment at the end of the lease to own it outright (as an example).
Tax Benefits to Consider
There are considerable tax benefits associated with heavy equipment financing. Perhaps the most significant is that you can write off up to $1 million of the equipment’s value on the year of your purchase rather than writing off the money you spend year after year, allowing you to cash in on the deductible value of the equipment at its full value during the purchasing year without having to shoulder the annual depreciation.
Alternatively, you can decide to claim the depreciation deduction or decide to write off the loan interest as a business expense – whichever works best based on your business’ tax circumstances.