Any small construction business owner knows that it is essential to have equipment that you can rely on. Outdated equipment can take a toll on your business by slowing down your work or delivering less-than-ideal results for your clients.
The solution for many is obtaining a construction equipment loan that provides the money they need to obtain necessary equipment without a huge output of money that reduces their working capital.
Select Funding provides construction equipment loans and financing at affordable rates. Here are six steps to take to get the construction equipment loan you need to deliver the results your clients deserve.
What is an Equipment Loan?
An equipment loan, sometimes referred to as equipment financing, is a type of lending that businesses may get if they need money to purchase equipment that will be used for their work. Unlike a personal loan, which may be used for any purpose, an equipment loan must be used to purchase necessary equipment.
The range of what you can buy with an equipment loan is broad. You can use a construction equipment loan to purchase any equipment or tools that aid you in running your business or working on behalf of your clients. The proceeds may be used for building supplies, new machinery, heavy equipment, or even office furniture and office machines.
What Can You Do with a Construction Equipment Loan?
When people hear the word equipment, they sometimes assume that the range of what they can do with a construction equipment loan is limited to things like machinery–but that’s not the case. In fact, you can use an equipment loan for a broad array of needs associated with your construction business:
- Construction machinery
- Vehicles
- Tools
- Office equipment
- Software
- Furniture
Here are a few examples of how a construction company might use an equipment loan:
- Update the vehicles you use for construction work, including pickup trucks, vans, and more.
- Purchase new tools to replace old ones that may not be working as well as they should.
- Invest in new construction management software to run your business efficiently.
- Redecorate your office to be more efficient and more welcoming for clients.
- Upgrade your office computers or mobile devices for employees.
You cannot use a construction loan for regular overhead expenses such as rent and utilities, for payroll, or for marketing and advertising. If you need working capital for those purposes, you can opt for small business financing or a small business loan.
How Do You Qualify for a Construction Equipment Loan?
The qualifications for a construction equipment loan vary from lender to lender. Banks tend to have the most rigid requirements and typically require a 20% down payment for an equipment loan, in much the same way they would require a down payment for a mortgage or car loan.
We should note here that an equipment loan and equipment financing are two different things. With financing, there’s typically no down payment required. There may also be less rigid requirements in terms of your credit score or revenue.
Select Funding provides equipment financing for construction companies and other small businesses. Here are our requirements:
- You must own your own business
- You must have a minimum of $100,000 in annual sales
- You must have a FICO score of 525 or higher
We do not require collateral. We ask applicants to submit documentation to support their application, but the requirements are minimal and many small businesses can qualify.
6 Steps to Get a Construction Equipment Loan
The process to get an equipment loan is simple and straightforward. Here are the steps to follow.
#1: Review Your Credit Report
Your credit score and credit history both play a role in helping you qualify for a construction equipment loan.
Some lenders may not look at your business credit score, but it’s still a good idea to review your report and make sure there are no errors or omissions. Business credit scores are on a scale from zero to 100 and a score of 75 or higher is considered good.
Every lender will look at your personal credit score from FICO to determine whether you are a good risk. As we mentioned above, Select Funding requires a minimum FICO score of 525, which is in the “poor” range according to FICO. Many lenders want to see a score that’s at least in the “fair” to “good” range, which would translate to a score between 580 and 739.
If you spot any mistakes on your credit report, you’ll need to file a request with the three main credit bureaus (Equifax, Experian, and TransUnion) to correct it. Taking this step before you apply for a construction equipment loan will improve your chances of approval.
#2: Identify the Equipment You Want to Buy
As we mentioned above, equipment loans may be used to purchase many things, including everything from software to a fleet of construction vehicles. You should have a clear idea of what you want to buy with the proceeds of your loan before you apply, including details about how it will help your business.
Keep in mind that some lenders may have stricter requirements than others in terms of what documentation they require regarding the equipment you purchase. You may need to provide information about the equipment’s cost, projected future value, and provide quotes from multiple manufacturers or retailers.
#3: Research Lenders
It’s always a good idea to research lenders ahead of time to determine who offers the best rates or who’s willing to work with you if you have a less-than-ideal credit score. As we noted above, banks tend to have the strictest requirements, while credit unions or alternative lenders such as Select Funding are willing to accommodate the needs of businesses who may not be able to qualify for a bank loan.
The benefit of researching lenders ahead of time is that you can narrow down your financing options and decide where to apply.
#4: Gather Necessary Documents
Documentation requirements can range from simple to complex. At Select Funding, the only documentation we require from borrowers are three months worth of bank statements that we use to verify your deposits. However, banks and other lenders may require significantly more documentation, including the following:
- Personal tax returns
- Business tax returns
- Business financial statements
- Documentation of revenue
You’ll need to check with prospective lenders to make sure you know what they need from you. Getting it organized ahead of time will help to streamline the underwriting process and get your money as quickly as possible.
#5: Complete Loan Applications
Once you’ve gathered the necessary documents, it’s time to apply for your equipment loan. Your personal credit will take a small hit for the required hard credit inquiry, but as a reminder, FICO allows for a shopping period of 15 days. Provided you complete your applications quickly, you should only get dinged once and the impact will be minimal.
In the event a lender comes back to you for more information, be sure to respond quickly and as thoroughly as possible to expedite the underwriting process.
#6: Compare Quotes and Close
Once you receive quotes from your chosen lenders, it’s time to compare the terms. Your comparison should include the following:
- Loan amounts
- Interest rates
- Total paid over the course of the loan, including principal, interest, and closing costs
- Loan term length
- Terms and conditions, including early prepayment penalties
In most cases, the best choice will be the loan that allows you to buy the equipment you want at the lowest total cost. Once you've decided, the final step of applying for a construction equipment loan is to attend the loan closing and sign your documents. It’s at this point that you will be required to pay any fees or closing costs associated with your equipment loan.
Depending on the terms of your loan, you may need to provide the lender with payment instructions for the manufacturer or retailer selling you the equipment to be purchased.
Construction Equipment Loans and Depreciation
After you receive the funds from your loan and have used them to purchase your equipment or for another approved purpose, you should know that there are other benefits to taking out an equipment loan.
The most important is depreciation, which allows you to take advantage of the decreasing value of the equipment you have purchased. Depreciation may be used as a tax deduction to reduce your business tax burden.
Equipment Lending vs Equipment Leasing
One of the most important choices you’ll make when obtaining new equipment for your construction business is whether to buy the equipment or lease it. We’ve focused on lending in this post, but you should be aware that leasing is also an option.
With equipment leasing, you don’t buy the construction equipment you need outright. Instead, you make monthly payments for a specified period. You may choose a lease-to-own option where you’ll take possession of the equipment at the end of the lease. The alternative is to lease the equipment for the specified period, at which point you could either renew your lease or lease updated equipment.
Get Construction Equipment Financing with Select Funding
Having the right construction equipment is a necessity for every construction company, because it’s what enables your team to complete projects on time and up to the standards expected by your clients. You can follow the 6 steps here to get the equipment financing loan you need to achieve your business objectives.
Do you need a construction equipment loan for your business? Select Funding is here to help! Click here to read about our equipment financing options and begin the qualification process today.
