Equipment Financing Guide: Heavy Equipment Finance Simplified

Written by Kendall Horn

February 1, 2021

Are you looking for equipment financing to grow your business? 

Fortunately, it doesn’t have to be confusing to finance a commercial truck or other heavy equipment. In this blog post, we’ll walk through the commercial finance process. 

Beginning the Equipment Financing Process

Once an application has been submitted to a lender, they consider several different factors when deciding whether to offer you a loan. We’ve outlined some of the most significant factors below. 

Credit Report/Score

Your credit report/score is the single most important factor in the lending process. Lenders use your credit report to determine if you have a history of paying your bills on time.

This begs the question, what is a good credit score?

Lenders view credit scores under 620 as bad, scores between 620 and 680 as fair, and scores above 680 as good.

If someone doesn’t have a credit score, that’s considered bad credit.

In addition to looking at your credit score, lenders will look at the details of your credit report.

Commercial lenders take a holistic approach when reviewing credit reports. They don’t expect potential borrowers to have a perfect credit report.

A great way to understand how lenders view credit reports is to think of them like a report card. Lenders understand that not everyone is a “straight A student”.

Lenders understand if borrowers have a few blemishes on their credit report.

Lenders like borrowers that have made timely payments on prior equipment purchases or have paid back money borrowed for other purposes (such as credit cards or house payments). They see these as indicators that a borrower will consistently make payments on a loan.

On the other hand, lenders view overdue child support, tax liens, bankruptcies, and vehicle repossessions as major red flags. 

It’s also possible for lenders to view a fair credit score in a negative light.

This is known as having thin credit. If a potential borrower only has two or three lines of credit on their credit report, the fact that they’ve consistently paid them is less significant.

Having a 650 credit score doesn’t mean that lenders will see a borrower as having good credit. Having a 650 credit score with a lengthy history of borrowing money will ensure lenders see a borrower as having good credit.

Nevertheless, even if you have bad credit, don’t be afraid to seek out commercial lending. It’s possible to qualify for a commercial loan with bad credit.

That said, bad credit loans usually have high-interest rates and require money down.

Fortunately, after making timely payments on one commercial loan, your credit score will likely improve significantly. This means you’ll qualify for lower interest rates when seeking commercial truck financing or other commercial finance loans in the future.

Nevertheless, you don’t have to take out a commercial loan to start improving your credit score today.

If you’re unsure of your credit score, Credit Karma is a great place to check your credit for free! 

Bank Statements

Some lenders will look at your bank statements, while others don’t even consider them in the underwriting process.

For lenders that look at bank statements, they want to see that you have a significant amount of money in your account at the end of the month (aka having large bank statements).

This is important for two main reasons.

First of all, if you have large bank statements, lenders know you can handle unexpected business expenses (such as emergency repairs).

Lenders see large bank statements as a safety net for your business, which indirectly protects their loan.

Secondly, having that extra money in your bank account means you can make a downpayment, should the lender ask for one. Lenders are most likely to ask for down payments if you’re a startup or have bad credit.  

Time in Business

Time in business is one of the biggest factors lenders consider when making underwriting decisions. It’s significant to lenders because startup businesses default on loans at much higher rates than established businesses. 

This begs the question, when is a company no longer a “startup” in the eyes of a commercial lender?

If a business has been operating for two years, most lenders will consider that an established business. Some lenders won’t view a business as being “established” until it’s been running for three years, but that’s less common. 

If a lender views you as a startup, they will want you to meet a higher bar in other areas. They may require a larger downpayment, expect a higher credit score, or expect you to be a homeowner. Ultimately, because startups are a greater risk than established businesses, they typically pay higher interest rates. 

Nevertheless, it’s important to remember that you only “have to be” a startup for a brief period of time. Once you’ve established your business you’ll no longer have to pay higher interest rates.

Home Ownership

All lenders see homeownership positively, and some lenders will require you to be a homeowner to receive a loan. 

Private Sale vs Dealer Sale

The vast majority of lenders will finance a private sale, but some will only finance semi-trucks or heavy equipment purchased from a dealer.

Lenders prefer financing equipment from dealers because it tends to be of higher quality than equipment purchased from private individuals. Dealers have the added pressure of wanting to maintain a good reputation.

As a result, dealers are more likely to fix major breakdowns that occur soon after a piece of equipment is purchased.

For this reason, at Fleet Lending Solutions, we recommend financing equipment purchased from a dealer.

The Piece of Equipment

Depending on what’s being financed, lenders may accept you as a borrower but may ask you to get a different piece of equipment. 

As far as trucks are concerned, most lenders won’t finance a truck with over 700,000 miles (with a fair number not financing trucks that have more than 500,000 miles). Lenders also consider the age of the truck, generally preferring trucks to be no more than 5 to 10 years old. 

The Underwriting Decision

Once a lender considers all these factors, they’ll send out an approval or denial. Once approved, a loan can typically fund within 2 to 3 days.  

What will my interest rate be?

This is one of the most common questions when it comes to heavy equipment financing. Unfortunately, it doesn’t have a single answer. 

Generally, commercial lending rates are higher than personal lending rates. This is because commercial loans generally have more risk than personal loans. 

If you’re an excellent borrower with good credit and multiple years in business, you can get a rate as low as 7%. If you’re a startup with poor credit your rate could be as high as 30%.

Regardless of the interest rate, it’s important to ask yourself, what’s the return on investment for your business?

If the interest rate is high, but the new equipment allows your company to make significantly more money, it’s possible that the loan still makes financial sense for your business.

In Conclusion

Commercial lending can be confusing, but it doesn’t have to be. If you need equipment financing or want to finance a commercial truck, contact Fleet Lending Solutions with any questions you may have or apply online today!

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