How to Obtain Construction Equipment Financing for Your Small Business

October 26, 2022

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The construction industry is one of the most equipment-intensive industries out there. Even the most basic construction projects will require specialized or heavy-duty tools, and some larger projects can involve the need for heavy equipment like bulldozers, excavators, or forklifts. When small business owners need to seek out heavy equipment financing, there are many options as a borrower.

No matter what type of equipment you need for a project, there are options outside of outright buying. You can also repair broken-down or outdated equipment, rent or lease equipment you may need for an extended period, or even upgrade the equipment you already have but can use a better version of. Depending on the specific equipment financing option you go with, you will likely be able to use that new funding for whichever type of equipment acquisition you choose.

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For lenders, underwriting a loan is the act of going out on a limb for a borrower. Lenders want to use available data to decide whether your company is likely or unlikely to repay the debt it’s taking on. They use several methods to determine how likely your construction company is to repay its debts:

  • Business Plan. What’s your company’s story? Why are you in construction? On top of that, savvy business owners will also include market research, expansion plans, and year-over-year financial projections. Lenders want to see that you’ve got a vision and a data-backed idea of where your company is headed in the future.
  • Credit History. Most financing options will involve a careful examination of your business’s credit history. While there are three separate credit bureaus that each use their own particular formulas to come up with a credit score, they are all built around similar data points: how much of your company’s available credit is it using? Have you ever missed payments on existing debt? How big is your company and how long has it been in business? What’s your oldest debt? Lenders want to see a lengthy credit history with your company paying off your debts on time and in full. Bad credit doesn’t necessarily mean you’ll never get funded, but it does mean you’ll likely face pricier funding, stricter loan terms, and will have to put up collateral.
  • Financial Statements. Many business financing providers want to get a clear view of your company’s finances before they agree to a loan. Depending on the specific type of loan you apply for, you may be asked to provide tax returns, bank statements, profit-loss statements, and other documents needed to confirm your annual revenue.

Types of Loans Available for Construction Equipment

Choosing the right loan option is an art. You know about your construction company’s creditworthiness. You know about your plans for the future, and you know the exact reason you’re looking for a business loan right now. But what’s the right type of loan to fit those criteria? The right loan will help both parties: it’ll protect lenders from excessive risk while also extending agreeable repayment terms to borrowers. Here are a few key types of loans you could use to purchase equipment for your construction company:

Equipment Loans

Equipment financing should be one of the first types of loans you look into when you’re looking at buying equipment for a construction business. Equipment loans are specifically structured for a variety of equipment-related expenses.

Let’s say you want to purchase a backhoe for $100,000 in order to better clear property. You’ve determined that purchasing is a better option than equipment leasing or renting. How would an equipment loan work to get you this backhoe?

First, you’ll fill out your loan application. Your business plan should explain why this is the right equipment for your company right now. You should meet the lender’s personal and business credit score requirements, and hit all of the eligibility markers provided by the lender, which can include a certain amount of time in business along with a minimum annual revenue.

On top of all of that, you’ll need a down payment, typically 20% of the purchase price. If you’ve got all of that in order, a lender may underwrite your equipment loan and then hold the backhoe as collateral.

That means if you’re unable to make payments on the loan, they will repossess the new equipment and sell it. That option protects lenders from excessive financial risk, which can also lead to lower interest rates for borrowers.

In many cases, equipment loans will be your best financing solution for heavy equipment because they’re designed to be your best option. If you’re looking to buy, upgrade, or repair equipment, an equipment loan should be your first option.

Lines of Credit

For many pieces of equipment, repairs are going to be a significant part of ownership. And some jobs might create situations where your business needs to acquire new pieces of equipment unexpectedly. For those situations and many others, business lines of credit can be fantastic options.

In a traditional business loan, you receive the loan amount up front and begin making monthly payments. In a line of credit, you instead are assigned a credit limit, not unlike a credit card. You draw on that line of credit and only pay interest (and make payments) on money borrowed under that limit. You can have a line of credit ready for months before you begin making payments.

Many businesses keep a line of credit handy at all times. They can function as a short-term cash flow boost when you need them most. If a pivotal piece of equipment breaks down, you don’t want to go through the extended rigamarole that can be associated with seeking out a traditional small business loan. A line of credit means you can go out and make the repair, replacement, or purchase without a second thought, and only pay interest on what you spend.

And much like a credit card, if you pay down that debt, you can then re-borrow under the limit. This is known as a revolving line of credit, and it can keep that line of credit available to you in the long term.

SBA Loans

The United States Small Business Administration (SBA) offers several types of loans that work well for purchasing business equipment.

SBA loans use taxpayer dollars to guarantee large percentages of business loans offered by traditional lenders and community-based nonprofit lenders. These loans are typically among the least expensive available, but because they’re guaranteed by taxpayers, the qualifications necessary to receive them are very strict. They also move quite slowly in order to ensure that taxpayer money isn’t being distributed to businesses liable to waste it.

There are three primary forms of SBA loans, any of which is a great option for equipment purchases in the construction industry:

  • SBA 7(a) loans can be considerably larger than you likely need for construction equipment (loan amounts climb up to $5 million), but smaller-sized SBA 7(a) loans can be an ideal option. There are a few requirements for qualification, including having made significant previous investments, but there’s a reason that 7(a) loans are the most common offered by the SBA: they’re affordable for borrowers, profitable for lenders, and can be a great way to buy new construction equipment.

  • SBA 504 loans are intended for companies investing in major fixed assets. Again, the maximum loan amount is $5 million, and 504 loans must be used on a project that promotes growth or jobs. Among the SBA’s listed uses of a 504 loan: “Long-term machinery and equipment.” If you’re looking to buy a piece of equipment that’ll require additional crew members, a 504 loan can be a great option. However, they don’t come with the sort of flexibility that a 7(a) loan brings.

  • SBA microloans are basically the miniature version of 7(a) loans. With loan amounts of up to $50,000, you won’t be buying a gigantic piece of real estate with an SBA microloan, but if you need to outfit your company with new tools, they can be the best option. Microloans are also funded through community-based nonprofit lenders instead of traditional banks, so you’ll be working with a lender close to home.

Section 179 Tax Deductions

One last way to save some money while purchasing new equipment for your company is by utilizing the Section 179 Tax Deduction.

Thanks to a provision in the Tax Cuts and Jobs Act (TCJA) of December 2017, business owners can deduct the full price of a piece of equipment on their taxes as long as that equipment was purchased that year.

In the past, you’d only be able to deduct a certain percentage of the cost of equipment based on how long that equipment was expected to last. If you bought a piece of construction equipment expected to last ten years, for example, you’d have to deduct 1/10th of the cost of the equipment each year for the next decade.

The Section 179 Tax Deduction means you can now deduct that entire cost up front, which can save a huge sum. If you buy a piece of equipment for $100,000 and pay a total tax rate of 35%, you’re saving a full $35,000 on your taxes the year of the purchase.

And the IRS is fairly generous when it comes to equipment eligible for this deduction. Property upgrades like roofs or alarm systems qualify, as do computers, heavy machinery, or air conditioners.

Combined with a smart loan, this tax deduction can be a major cash-saver for businesses in need of equipment.

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