Construction equipment financing

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Page written by Chris Godfrey. Last reviewed on October 9, 2024. Next review due October 1, 2025.

Construction equipment – diggers, bobcats, cranes, dump trucks, graders, loaders, etc – is used by industries as varied as construction, agriculture, forestry, landscaping and mining. However, this kind of equipment does not come cheap and paying for it with working capital can often be prohibitive. Fortunately, there’s an answer to this problem: Construction equipment financing. Pay for the equipment as you use the equipment. Give your organization the major machinery it needs without hurting cash flow.

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How do I know if I need an equipment loan?

It’s a question of efficiency. If your current construction equipment has reached the stage where repairs and maintenance are becoming more expensive and more frequent, or you find yourself having to take on costly short-term rentals for some equipment that you do not have, then it may be time to upgrade or enlarge your equipment pool. Additionally, if you’re taking on a special project that warrants buying or leasing a new piece of equipment, it may be worth doing so.

Ultimately, regardless of the reason you need new machinery, equipment financing is often a better way to obtain it than paying for new machinery out of working capital. An equipment loan takes the strain off your finances and can give you the option of obtaining better equipment than you could afford if you were paying with cash.

How do construction loans work? See below:

Types of equipment loan:

Equipment loans fall into two classes – business loans to buy the equipment, and leases that are long-term equipment rental agreements. Let’s look at the differences between these types of financing:

Business loans to buy the equipment

Although many types of business loans are suitable for buying construction equipment, they all work with the same basic format: You borrow a sum of cash and then repay it over time. Interest charges and fees are added to the principal amount you borrow, and the lender may retain a lien on the equipment during the term of the loan. At contract end you’ve paid off the loan and you own the equipment outright.

Advantages of business loans to buy construction equipment

Regular repayments can improve your financial planning.
You own the equipment at contract end.
May allow you to buy better and a more expensive bobcat than buying with cash.

Disadvantages of business loans to buy construction equipment

Some loans may require added collateral or a personal guarantee.
Interest rates on some business loans can be high
At contract end the bobcat may still need replacing or upgrading

Lease the equipment with a finance or operating lease

Leasing works differently from business loans. With a lease, you’re not buying the equipment, you’re taking on a long-term rental. Depending on the type of lease you choose, (finance lease or operating lease), you may have the option to buy the construction equipment at contract end for a pre-agreed sum, (which could be as low as $1 but is typically the residual value of the equipment – which means what it’s worth in used condition).

Because you’re not repaying the whole cost of the equipment, leasing usually requires lower monthly payments than a business loan. You may also pay a smaller down payment – perhaps equal to one or two month’s repayment instalments.

If you choose not to buy the equipment at the end of the lease, (or you have chosen an operating lease that forbids it), the equipment goes back to the lender. You would then need to take out a new lease and obtain new equipment. (Which could allow you to obtain more modern and up to date machinery).

Some lessors (lenders) may give you the option to extend the lease if you prefer to keep the equipment but do not wish to pay the residual.

Advantages of leasing construction equipment

Pay a lower monthly sum.
May pay a lower down payment.
Could allow you to obtain better and more expensive equipment than a business loan.
No added collateral required.
May have the option to buy the equipment at contract end.

Disadvantages of leasing construction equipment

May not own the equipment at contract end.
There may be restrictions on the types of equipment you can lease.

What do I need to qualify for an equipment loan?

Although every lender will have their own qualifying criteria, some fundamental rules apply. In most cases, lenders will need to see:

At least six months trading history.
Regular revenue stream.
Good business and personal credit scores.
Enough surplus working capital to meet the loan/lease repayments.

You will also usually need to provide bank statements, tax returns and other financial documentation. However, even if your credit score is weak and/or you’ve been turned down elsewhere, it may still be possible to get the equipment financing you need. To find out if you qualify before you apply, contact Swoop to discuss your funding needs with a finance expert.

Can I get construction equipment financing from a bank?

Yes. Although construction equipment financing is more readily available from online lenders and specialist heavy machinery finance houses, some banks and credit unions may provide the funding you need. However, traditional lenders are usually much slower to provide financing than alternative lenders and you may have to provide significantly more documentation to get an approval.

Can I get a loan with bad credit?

Probably, but you should expect to pay higher interest charges and you may be limited in the amount you can borrow. You may also have to provide a larger down payment and perhaps a personal guarantee. This will make you personally responsible for the debt if your business defaults on the loan.

What is the application process for construction equipment financing?

Obtaining a construction equipment loan or lease is no different to obtaining most other forms of business finance – preparation is key:

Identify your need for the loan.
Why do you need the money? You must present a strong case for funding to secure an equipment loan and your financial records must support this need, indicating how the loan will deliver your plan – and critically, how you will pay the loan back.
Check your personal and business credit scores.
It is common for mistakes to occur on credit reports and incorrect information could have an adverse impact on your loan application. If there are errors, get them fixed before applying for finance – and be aware that fixing a credit score can take time and there are no ‘fast credit repairs’ despite the many promises from online ‘credit doctors’ who say they can perform miracles for your score.
Get your paperwork in order.
Depending on the type of financing you apply for and how much money you need, lenders may need to see bank statements (at least 6 months), balance sheet, profit and loss statements, cashflow projections, list of debts, list of assets, customer database, documents that reveal the structure of your business (corporation, LLC, etc.), certificates of good standing, tax returns and more. As a rule of thumb, loans require more paperwork than leasing and the larger the sum you borrow, the more documentation the lender will ask to see.
Research and compare lender programs:
Interest rates and fees for construction equipment financing can vary significantly, so it makes sense to shop around before settling on a deal. You could do this by approaching banks, credit unions and online lenders one by one, or you can use the services of a loan marketplace that will introduce you to a choice of equipment loans from different lenders. Some marketplace platforms can also give you advice and help you with the application process. This can be especially useful for borrowers who have never taken out an equipment loan before.

Apply: Make sure you have provided all the necessary documentation and have answered any extra questions the lender may have. Once you’ve submitted your application it may be worth checking with the lender to be sure they have your package and to ask if there’s anything else they need. Keep in mind that some financial institutions – typically banks and credit unions – will take longer to review your application than online lenders, where you may get an approval in a matter of hours or even minutes.

Does construction equipment finance require collateral?

It depends on the type of financing you choose. Equipment leasing and some business loans use the equipment as collateral and no other collateral is required. Alternatively, other business loans, such as a straightforward business term loan, may require you to provide collateral to protect the lender – usually commercial property or other business assets.

What are the interest rates for a construction equipment loan?

Interest rates for commercial equipment loans and leasing can be anywhere from 6% to 35% APR and are dependent on the type of loan you choose, your credit history, and the sum you need to borrow.

Get started with Swoop

No matter if you’re seeking your first equipment loan or you’re a seasoned borrower, working with business finance experts can make all the difference when applying for funding. Contact Swoop to discuss your borrowing needs, get help with your application and to compare high-quality equipment financing deals from a choice of lenders. Give your business the equipment it deserves. Register with Swoop today.

Written by

Chris Godfrey

Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.

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