According to the Census Bureau, spending in the U.S. construction industry was estimated at a seasonally adjusted rate of about $1.33 trillion during December 2019.
The takeaway? At some point or another, you’ll likely need a new piece of equipment, along with some form of financing.
Here are a few financing options worth considering.
Conventional heavy equipment financing is available for both loans as well leases. For loans, the acquired equipment serves as collateral for the amount you borrow. What does this mean? If you fall behind on payments and can’t catch up, the lender can take the equipment to recoup losses. Because these lenders can minimize their risk, construction equipment financing often is considered less of a risk for lenders.
It’s important to note that leasing is different from renting. For starters, leasing typically requires longer terms than renting. Leasing terms also typically are binding, meaning you can’t turn in the equipment early without being penalized. In contrast, you could rent equipment for a day, a week or a month at a time.
You might consider buying purchasing equipment through a loan if:
- You intend to use the equipment longer than a lease term
- The equipment has good resale value
- You can afford equipment maintenance and repairs
You might consider getting equipment from a leasing company if you:
- Like the idea of trading up for a newer model at the end of your lease term
- Want to avoid a down payment
- Are interested in having an equipment maintenance service contract
Repayment terms for heavy equipment financing typically won’t exceed its useful life. As such, financing can range from 1 year to 5 years, though shorter and longer terms may be available.
Depending on your creditworthiness, you may be able to finance up to 100% of the price of the equipment you want, though a down payment of up to 20% may be required, depending on the lender.
Here’s more info from our experts to help your small business thrive.
While some conventional banks may advertise equipment rates “as low as” X%, it’s important to note the fine print. It typically stipulates the final rate you’re quoted is determined based on your credit history. An advertised rate of 4.75%, for instance, may not be your final rate. Origination fees may also apply, typically a percentage of the total loan amount.
With alternative lenders, you may find that heavy equipment financing rates start around 8% and go up depending on factors such as credit score, loan type and loan amount.
Loans guaranteed by the Small Business Administration (SBA) offer some of the most competitive interest rates and repayment terms, though the process can be lengthy. If you’ve been denied a conventional bank loan and aren’t in a rush for funding, consider an SBA loan. The qualifications are typically less challenging.
With these kinds of loans, the SBA guarantees a certain percentage of each loan, up to 85% in some cases. The maximum repayment term for SBA loans used for equipment or working capital is 10 years.
Popular types of SBA financing options include:
SBA Express Loans
SBA Express loans offer the fastest funding option of all SBA-backed loans. You could be approved for up to $350,000 in as few as 36 hours and funded in 7 days after approval. The maximum interest rate you can be charged for an SBA Express loan is the prime rate plus 6.5% for loans of $50,000 or less and prime plus 4.5% for loans exceeding $50,000. As of Oct. 31, 2019, the U.S. prime rate was 4.75%.
SBA 7(a) Loans
If your heavy equipment financing needs exceed $350,000, consider a 7(a) loan. While the funding process for SBA 7(a) loans could take some time, you could secure up to $5 million in funds. The maximum variable interest rates that lenders can charge for SBA loans vary from a base rate plus 2.25% interest to a base rate plus 4.75%, depending on loan term and amount borrowed.