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calendar    Jul 12, 2021

How to Beat Cash Flow Shortages With Heavy Equipment Financing

What is heavy equipment financing?

Paying for the purchase price of heavy equipment upfront is prohibitive. Keep reading to find out how you can lessen the financial blow by utilizing heavy equipment business financing.

Heavy equipment is a term typically used in the construction industry to refer to the heavy machinery used.

Therefore, heavy equipment financing means securing a business loan or lease to acquire, upgrade, or replace heavy-duty equipment and specialized machinery and vehicles. These may include construction equipment, such as bulldozers and dump trucks.

It is different from equipment financing, which denotes funding for smaller items such as computers, desks, and file cabinets.

If you sell heavy equipment, then you understand their prices can be colossal. It makes financial sense to sell the equipment to your customers through net terms. The ideal would be arranging heavy equipment leasing or financing options for them.

Since heavy equipment is costly, heavy equipment financing allows even small businesses to purchase the right equipment without making upfront payments.

You would use heavy machinery in timber, excavation, mining, and construction projects.

How heavy equipment financing works

If a heavy equipment financing company decides you qualify for a heavy equipment loan, they will offer the following terms:

Funding amount: you may get funding up to 100% of the purchase price. The equipment will serve as collateral. If you are not creditworthy or when buying used equipment, the finance company will require a down payment.

Interest rates: since it is not a risky loan, equipment financing loans feature interest rates as low as 5%. The usual range is between 8-30%, though.

Repayment terms: how long you pay the loan will depend on the projected lifespan of the equipment. In short, whether you go for the purchasing or leasing option, your repayment periods will not exceed the equipment’s useful life.

Note that the size of the down payment, equipment condition, your credit score, and how long you have been in business will determine how favorable the financing terms will be.

Types of equipment finance loans

SBA loan

The Small Business Administration (SBA) loan is an excellent choice for established businesses with solid annual revenues and credit scores. They offer various loans, but the best for equipment financing is the SBA CDC/504 loan, as it is meant for major fixed assets.

To qualify, you’ll need:

  • To be a for-profit business
  • It should be a small business
  • A personal minimum credit score of 650
  • Net worth of less than $15 million and $5 million net income after federal income tax, two years before the application

The 504 loan has a loan ceiling of $20 million, repaid within 10-25 years, while interest rates range between 10-20%.

You will have to make a 10% down payment, though, and approval may take as long as three months.

Term loan

If you do not meet the requirements for an SBA loan, perhaps you should try a term loan. Depending on the loan amount, it could be a short or long-term loan.

These are loans repaid over an agreed term, usually between 1-25 years. You would need to make periodic payments, typically monthly installments during that time.
Most borrowers who use conventional lenders would need strong credit scores, at least 620, and be profitable. Online lenders do not have such stringent requirements on credit scores, profitability, or how long you have been in business.

If you go for heavy equipment loans using term loans, you can secure up to $250,000 and interest rates ranging between 4% and 30%.

Builder choosing heavy machinery for construction with a sales consultant standing with some documents

Equipment loans for businesses with bad credit

The typical heavy equipment finance lender offers industrial equipment financing. They would require the following from business owners:

  • A FICO credit score of at least 550
  • Be in operation for at least six months
  • Equipment quote from a vendor

But what if you are a startup or have a low credit score? Does that mean you can’t get a heavy equipment financing loan?

Not necessarily. Most lenders are lenient about heavy equipment financing since the piece of equipment is collateral. Alternatively, they will ask for a down payment or go through your books to confirm that you have good revenue.

Since purchase prices are hefty, a down payment is likely to be substantial too, raising a Catch-22 situation: where do you get such a large sum when you need a loan?

Trying to raise such an amount of money will cause serious cash flow issues. That’s why you need an alternative financing solution to traditional lenders, such as Resolve.

Digital net terms as an alternative to equipment financing

If you sell heavy equipment, you will already know that your customers can struggle to pay that large invoice. It’s expected as a supplier that you will offer net terms to your customers - this is often 30 or 60 days to complete payment of the invoice.

However, you may run into cash flow issues because you ideally need that working capital to fulfill your own financial obligations, pay for more stock, or just use the cash for growth. Resolve can solve this net terms cash flow crunch with their digital net terms solution. Resolve will advance pay the net terms invoices of your approved customers. In fact, you will get the cash in the bank in 1 day, while your customers still get 30, 60, or even 90 days to pay. Maybe you’re thinking, ‘Hey this sounds like Factoring!’. Resolve is really the modern alternative to Factoring, it solves for cash flow but doesn’t impact your reputation. Find out why Resolve is better than factoring.

Vehicle construction at sunset.

How can you use heavy equipment financing?

  • To upgrade equipment
  • Buy or lease construction vehicles
  • Acquire project-specific equipment

Types of heavy equipment covered by the finance

Heavy equipment financing would typically cover these heavy equipment:

  • Cranes
  • Tractors
  • Forklifts
  • Backhoes
  • Excavators
  • Pile drivers
  • Dump trucks
  • Street sweepers
  • Paving machines
  • Long-distance trucks
  • Tunnel boring machines

Benefits of construction equipment financing

Here are the reasons why businesses consider heavy equipment financing:

Variety: depending on your needs, you can enquire from purchasing or leasing companies.

Additionally, there are plenty of equipment leasing and loan options available for large or small machinery. Whether you are looking for a road machine, industrial tool, or building construction equipment loan, there will be an equipment financing option for you.

Tax: according to the IRS Section 179 deduction guidelines, buying or leasing new equipment may entitle you to some tax relief. You may deduct 100% of the equipment purchase price from your taxable income even though you will pay for it over time.

As you would expect, there are a few caveats. In 2021, the maximum deductible amount is $1,050,000. Further, you must also have a taxable profit in the year you bought the equipment for you to qualify for that tax relief.

In short, if you bought equipment worth $500,000 and you had a taxable income of $25,000, you can only deduct $25,000.

The great thing is Section 179 applies whether you bought new or used equipment.

Flexibility: if you go the leasing route, that offers a ton of flexibility because you can:

  1. Sidestep the thorny issue of depreciation
  2. Retain liquidity since your cash is not tied to an asset
  3. No dealing with substantial maintenance costs

Customization: most heavy equipment lenders offer customized financing structures. These are some of the factors they will consider:

  • Business needs
  • Monthly budget
  • How many years the buyer has been in business

Increased sales: if you required every buyer to purchase heavy equipment using cash, you would run out of business! That’s because very few can afford the sky-high pricing.

It makes sound financial sense to accept monthly payments instead, and heavy equipment financing can help avoid a cash crunch when you do.

To sum up, heavy equipment financing can help businesses acquire heavy machinery with prohibitive price tags. Conventional lenders require borrowers to have excellent credit scores. If you do not meet such strict requirements, you could try alternative lenders.

One such lender is Resolve, a company providing comprehensive net terms management, robust credit checks, and one-of-a-kind accounts receivable solutions.

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