Your business needs equipment, but you have bad credit? You’re not alone.
A multitude of business owners struggle to obtain equipment financing because of their below-average credit scores. Bad credit will complicate your equipment financing process, but you still have some options available to you.
Here’s the good news:
Businesses with poor credit can still secure equipment financing as long as they understand how their credit score affects their financing terms and know which steps to take to boost their approval likelihood.
Bad credit brings multiple challenges to those looking for business equipment financing options. The most obvious? Higher interest rates. Lenders interpret low credit scores as increased risk, which leads them to demand higher charges on your application to compensate for this risk. Businesses that maintain poor credit standings usually incur interest rates that exceed those of excellent credit businesses by 7-10%.
But interest rates aren’t the only impact. A bad credit report usually results in reduced equipment financing amounts since lenders often decline to cover the full equipment cost and impose shorter payment periods ranging from 2-3 years instead of 5-7 years while demanding bigger down payments between 20-30% rather than 0-10% and requiring additional collateral beyond your equipment.
The equipment finance industry is forecasted to expand 2.4% in 2025 when it reaches $1.4 trillion and then grow an additional 7.3% over three years. The expanding market will attract additional lenders who can offer more financing choices, even for businesses facing credit difficulties.
Inside This Equipment Financing Guide
- The Real Cost of Bad Credit on Equipment Loans
- Alternative Financing Options for Bad Credit Borrowers
- Steps to Improve Your Chances of Approval
- How to Rebuild Your Credit While Financing Equipment
- Your Financing Path Forward
The Real Cost of Bad Credit on Equipment Loans
Let’s look at the actual dollars and cents impact of bad credit on financing heavy equipment and other business machinery.
Consider this example:
The company requires financing options to purchase $100,000 worth of manufacturing equipment. The financing terms for equipment can vary depending on the borrower’s credit profile.
Good Credit (700+ Score):
- Interest rate: 5-7%
- Term: 60 months
- Monthly payment: Approximately $1,887-$1,980
- Total interest paid: $13,220-$18,800
Bad Credit (Below 600 Score):
- Interest rate: 12-16%
- Term: 36 months
- Monthly payment: Approximately $3,330-$3,520
- Total interest paid: $19,880-$26,720
Your monthly payments could be up to $1,640 higher while potentially incurring over $12,000 more in interest charges.
The sector must implement careful risk management because delinquencies beyond 30 days remained above 2% throughout most of the year. This metric explains why financial institutions are implementing stricter terms for lending.
Alternative Financing Options for Bad Credit Borrowers
Explore these financial solutions if traditional equipment loans are not an option.
Equipment Leasing
Leasing equipment enables you to use it for a set timeframe without buying it outright. Benefits of equipment leasing cover multiple areas such as reduced monthly payments and simplified approval for bad credit borrowers along with potential tax benefits and automatic equipment upgrades when the lease ends.
Financing options exist for those with credit scores down to 575 from certain equipment lenders but these options typically have higher interest rates and less beneficial terms.
Equipment Financing Companies & SBA Loans
Equipment financing companies have more adaptable requirements compared to traditional banks. These lenders view the equipment as valuable collateral, which allows them to extend credit to borrowers who have poor credit histories.
Businesses with poor credit scores can use Small Business Administration (SBA) loans to purchase equipment. A government guarantee lowers lender ris,k which may lead to improved loan terms.
Invoice Financing & Merchant Cash Advances
Outstanding customer invoices serve as collateral for invoice financing,g which evaluates customer creditworthiness rather than your personal credit status.
Businesses that generate substantial credit card sales each day can access fast capital through merchant cash advances by agreeing to pay back a share of their future earnings.
The total bank lending to small businesses fell by 18% in 2024, while 60% of these businesses have plans for major capital investments in 2025.
Steps to Improve Your Chances of Approval
Take these specific actions to enhance your equipment financing application even if you have bad credit.
1. Increase Your Down Payment & Collateral
Lenders will perceive less risk if you make a down payment between 20% and 30% of the equipment’s value. To improve financing approval chances and obtain better financing terms, present business assets beyond the primary equipment as supplementary collateral.
Firms with poor credit ratings can enhance their financing prospects by arranging their financial records and offering extra security while making larger initial payments.
2. Demonstrate Strong Cash Flow & Business Potential
Present thorough financial reports that demonstrate a steady positive cash flow. Prioritize equipment investments that play a key role in daily operations and generate revenue for the business. Show financial projections that demonstrate the revenue growth or cost savings resulting from the new equipment.
3. Secure Additional Support
Whenever possible, secure a cosigner with better credit standing from either a business partner or investor to back the loan. Establish personal connections with lenders instead of relying solely on digital loan applications. Schedule face-to-face meetings with potential lenders so you can describe your credit circumstances and your business proposal.
How to Rebuild Your Credit While Financing Equipment
Securing equipment financing when you have bad credit represents just one step in a broader solution. To avoid future challenges:
Establish Perfect Payment History
Establish a separate repayment fund that will exclusively manage loan payments. Configure automatic business account payments to prevent missed or late payments.
Monitor & Build Business Credit
Monitor your personal and business credit reports regularly to identify any errors. Have your suppliers submit your payment history to business credit bureaus. Separate personal and business accounts to create a distinct business credit profile.
Your Financing Path Forward
Business owners with bad credit can still secure equipment financing to support their operations. Comprehending the available bad credit equipment financing options will allow you to make well-informed decisions despite unfavorable terms and keep your business in motion.
Remember these key points:
- Businesses with poor credit can obtain equipment financing but must agree to alternative payment terms.
- The actual cost variance between financing options may result in significant changes to both your monthly installment payments and the cumulative interest amount.
- Businesses can utilize alternative financing methods to proceed when traditional loan options remain inaccessible.
- Your approval chances increase significantly through strategic preparation.
- Future financing needs require you to rebuild your credit through dedicated efforts.
Use your existing equipment financing to build a track record of reliability and improve your credit standing. Maintaining a record of timely payments becomes a valuable asset for obtaining improved terms during future financing arrangements.
Frequently Asked Questions
What is the minimum credit score needed for equipment financing?
Though specific lenders provide equipment financing for scores down to 575, traditional lenders generally require credit scores of 650 or above.
Is it better to lease or finance equipment with bad credit?
Leasing presents a simpler approval process and reduced monthly payments for individuals with bad credit, but does not allow for equipment ownership after the lease ends.
How much of a down payment will I need with bad credit?
Lenders typically require a down payment of 20-30% from borrowers with bad credit compared to just 0-10% from businesses that maintain excellent credit.
Will equipment financing help rebuild my business credit?
The lender must report to business credit bureaus if you want the equipment financing to help rebuild your business credit. Verify the lender’s policy about reporting your payment history before you sign any agreement.
