Acquiring the appropriate tools is essential for the success of a contracting venture. Heavy equipment financing can be challenging for numerous small business owners. It is not because they are not eligible, but rather they are not ready for the process and so end up with unfavorable conditions that impact their cash flow for a long time.
Get Your Financial House In Order First
Here’s something a lot of contractors don’t realise until they’re already sitting across from a lender: your credit score is only part of the picture. Equipment lenders – especially the ones who work with smaller contractors – want to know if your business actually generates enough cash to cover a new debt payment and still have something left over. That’s your Debt Service Coverage Ratio, or DSCR. Most lenders want to see it above 1.25, so for every pound of debt repayment you owe, they want to see at least £1.25 coming in.
Before you start filling out applications, pull your commercial credit report from PayNet. That’s the database most heavy equipment lenders actually use – not the consumer credit agencies people usually think of. Mistakes show up on these reports more often than you’d expect, and sorting them out before you apply is a lot less stressful than trying to explain an error mid-application.
You’ll also want your financials in decent shape before you pick up the phone. Two years of business tax returns, a recent profit and loss statement, and a balance sheet. It doesn’t have to be fancy – but having it ready and organised tells a lender straight away that you know how your business is running. It also speeds things up considerably once you’re in the process.
Don’t Let Soft Costs Drain Your Reserves
The selling price is never the full amount. Shipping, delivery, rigging, and initial operator training – or “soft costs” – can quickly accumulate a few thousand more dollars on top of the list price. Many contractors write checks for that straight out of their bank account. It’s far easier to simply finance these expenses over the term of the loan as well. You pay a bit extra but keep control of your cash.
Most lenders will also advance the soft dollars as part of the whole financing package. Partnering with an experienced industry broker like Harry Fry & Associates means you can finance big yellow iron, such as an excavator or wheel loader, with those soft costs rolled in. You might cough up a little interest on those soft dollars, but nowhere near as much as you would on the balance of your checking account if it weren’t for leaving that cash there.
Match Your Loan Structure To How Construction Actually Works
A consistent monthly payment schedule sounds good – if you’re running a business that has a steady stream of revenue coming in all year. That’s not most small contractors. You have a season where you’re working like hell, a season where you’re doing your books, and a season that you’re just getting by. A loan designed without that truth in mind compromises the working capital you need back at the job site to make it through winter.
If that’s you, ask for a loan with a step-up payment structure or a skip payment structure. With a step-up structure, your monthly payments are lower in the early months of your loan when you have lower revenue and increase later in the term as you ramp up and your revenue is higher. A skip-payment option allows you to skip one or two monthly payments a year with no fee. Those skipped payments are typically used during your season of lowest revenue. These are tricks of the trade for equipment finance companies. They’re not hard to get.
Know Which Type Of Lender To Work With
General commercial banks often advertise competitive rates on equipment loans, and sometimes those rates are genuinely attractive. The catch is that bank underwriters rarely have the technical expertise to accurately value specialized machinery. They’ll rely on book values that may not reflect actual liquidation value in your specific equipment category, which leads to conservative loan-to-value limits and slower approvals.
Specialty equipment lenders allow small contractors to secure customized terms specifically tailored to high-value assets like cranes and rigging equipment – lenders who understand what that machinery is actually worth if it ever needs to be sold at auction, and who can price the risk accordingly.
OEM financing – loans offered directly by manufacturers – is worth comparing as well. Promotional rates can be low, but approval criteria tend to be stricter and terms less flexible. Run the full cost-of-capital comparison before defaulting to the manufacturer option just because the rate looks good.
Use The Tax Code To Your Advantage
Almost 80% of businesses will finance some of their equipment (Equipment Leasing and Finance Association). The smart ones will also utilize Section 179 to write off 100% of the equipment’s purchase price the year it’s first put into business. This deduction literally writes a check to offset the cash outflow of a down payment, and on a $150,000 machine, it can be a big chunk of the net acquisition cost.
Whether you are structuring a capital lease, one in which the asset sits on your balance sheet, or an operating lease that is treated as no more than a business expense, talk to your accountant before signing anything. The depreciation and tax implications are different, and the correct structure all depends on what you are making right now, what you are projected to make over the next few years, and how long you really do plan on owning the piece of equipment.
Instead of writing a large check to purchase your equipment, you are writing a smaller check each month. Those checks turn into negative equity if they go on too long past the useful life of the equipment.
