Banks and other traditional lending programs often advertise their rates to businesses with great credit, leaving the impression that only companies with established credit scores and a solid payment history need apply. That is not the case, however. While many traditional business loan programs with terms in excess of a decade have stringent credit requirements, alternative equipment financing options are more accessible. Often built with loan terms of seven years or less, these private loans are based on the equity in the equipment being purchased.
Calibrating for Credit Challenges
Lenders control the risks they face when offering loans by looking at three major factors.
- Credit score
- Collateral value
- Cash income
If a borrower has an overabundance of one or two of these factors at hand, then the third becomes less important. Banks emphasize credit score to make loans accessible to companies with good payment histories and lower income numbers. Private lenders often tailor programs to flexibly accommodate the balance of risk for each borrower. As a result, imperfect credit might make financing more expensive, but it does not move it out of reach.
Lowering Loan Costs With Bad Credit
If your credit score is not helping the cost of equipment financing for your next acquisition, there are two ways to lower the finance costs. The first is to go for shorter loan terms to reduce the risk window for the lender. This strategy has its limitations because you need to keep an eye on your monthly overhead, but it is worth considering. The other option is to increase the size of your down payment, lowering the LTV of the financing package and increasing the equity in the equipment if you happen to default. Most lenders will accommodate both options at once to optimize loan costs.
Financing With Zero Down Payment
If you are willing to pay the higher interest rates and adjust loan terms, some private lenders even offer zeron down options on equipment. This is particularly useful for mid-priced items with short usable lifespans like office computers, because when they go down they need to be replaced immediately. Private lenders are good options because they have the ability to adjust each new loan package to the needs of the moment. That means low cost long-term options available for equipment financing when you’re putting a hefty down payment on major infrastructure as well as zero down options for those days when you need a machine immediately.