You can consider heavy machinery the unsung heroes of the construction world that are shaping our skylines. Construction equipment like bulldozers and cranes play an irreplaceable role in day-to-day operations. However, when a backhoe’s engine stalls or a hydraulic leak halts a crane mid-air, the entire project comes to a stop. Downtime due to equipment breakdowns can disrupt schedules, causing financial losses for business owners and missed deadlines. Purchasing new construction equipment outright poses a few hurdles: the high initial upfront costs, depreciation value over time, and rapid advances in the tech field render today’s cutting-edge machine outdated tomorrow. Enter equipment financing— a practical financial solution that allows access to expensive machinery without the ridiculous upfront costs.
Understanding Construction Equipment Financing
Construction equipment financing is a financial strategy that allows businesses to acquire the necessary machinery without paying the full cost upfront. The two main types of construction equipment financing are commercial equipment loans and commercial equipment leasing.
How commercial equipment loans work
Commercial equipment loans are lump sum amounts given to the borrower to purchase necessary equipment like cranes, excavators, or even that fancy concrete mixer. Term loans include a fixed interest rate predetermined repayment term. The equipment itself often serves as collateral for the loan. Once the repayment is complete, your business fully owns the equipment. Most lenders require businesses to be in business for at least six months and make over $250,000 in annual gross sales. While credit requirements vary from lender to lender, having a credit score above 625 opens the door for more options.
How commercial equipment leasing works
Construction equipment leasing is more like a rental contract. During the lease, you do not have ownership over the equipment but at the end of the lease, you have the options to purchase the equipment, renew the lease, or return the equipment. Commercial equipment leasing typically has lower initial costs compared to buying and are usually fully deductible as a business expense. There are two main types of commercial equipment leases. Here’s how they work.
Capital Lease
What is it? Businesses use capital leases for equipment they plan to keep or buy after the lease period. The business owner intends to eventually own the leased equipment.
Responsibilities: The lessee (the one leasing the equipment) is responsible for maintaining the assets. For example, if you are leasing a car, you are responsible for changing the oil in your car.
Balance sheet impact: Both the asset and the liability show up on the borrower’s balance sheet.
Operational Lease
What is it? This short-term and flexible leasing option is ideal for equipment needed temporarily or that might become outdated. The owner of the equipment (the lessor) takes the risk of the equipment’s future value.
Responsibilities: The person leasing the equipment pays for the usage during the lease term. Lessees can cancel their lease early (and usually without a penalty).
Balance sheet impact: There’s no impact on the lessee’s balance sheet.
How to qualify for construction equipment financing
When seeking construction equipment financing, several factors come into play:
- Time in business: Most lenders require a minimum of six months in business as a longer business history indicates stability and reliability. Startups can still qualify but they must demonstrate a sufficient cash flow.
- Annual revenue: Annual revenue requirements vary depending on the lender. Lenders prefer an annual revenue of around $250,000 or more.
- Credit score: A credit score of 625 or higher is generally preferred. Strong credits show signs of financial responsibility and reduce the risk for the lender.
How to finance equipment for a construction company
Whether you’re a seasoned contractor or just starting out, understanding the equipment financing process is crucial for acquiring the necessary machinery. Let’s break it down into a few manageable steps.
Step 1: Assess your needs
Before you dive into your financing options, take a good look at what your business needs. Consider the following factors:
Equipment types: Identify and list the specific heavy construction equipment needed.
Cost analysis: Understand the total cost of ownership. This includes purchase price and ongoing expenses like insurance and repairs.
Lifespan & usage: Evaluate how long the equipment can remain productive and how often it may require a replacement.
Business growth: Determine whether the equipment will contribute to your business’s growth and profitability.
Step 2: Compare Loans and Leasing
Do a deep dive into the differences between loans and leasing and the pros and cons each option can bring to your situation. Here are some specific scenarios where equipment loans and equipment leasing make sense for a company:
Equipment Loans
- Major expansion project: an equipment financing loan enables you to invest in the necessary equipment like bulldozers, loaders excavators without straining your working capital.
- Updating vehicles: If your construction company relies on a fleet of vehicles including pickup trucks and vans, an equipment loan allows you to replace aging vehicles with new, more efficient models.
- Upgrading technology: An equipment loan allows you to invest on modern technology or can fund the adoption of construction management software,
Equipment Financing
- Short-term project: Leasing provides the flexibility to return equipment once a project ends so you don’t have to worry about storing specialized equipment you hardly use.
- Seasonal fluctuations: If your construction business experiences busy and slow seasons, leasing lets you pay and use for specialized equipment based on demand, avoiding idle machinery during off peak seasons.
- Preserving cash flow: Leasing requires minimal upfront costs, allowing you to allocate your funds strategically.
Step 3: Research and Compare Lenders
Shop around for financing companies that specialize in construction equipment loans. Be sure to check credit score requirements, collateral expectations, and revenue thresholds. Compare interest rates from different lenders. Look for a lender that can offer you a flexible repayment plan that aligns with your business’s cash flow.
Make sure you have the documents needed for the application. National Funding requires an equipment quote from a vendor, as well as your credit score.
Step 4: Review and Sign the Contract
Once your business is approved for a loan or equipment lease, carefully review the contract. Pay close attention to:
- The length of the lease
- Interest rates
- Collateral
The Bottom Line
Choosing the right financing option is a strategic move that requires careful consideration. Whether you opt for loans or leasing, understanding your business needs, researching lenders, and preparing the necessary documents are crucial steps. Make informed financial decisions and equip your construction business for success, one project at a time.
