When a startup first launches, it has a limited amount of investment capital to spend on things like locations, supplies, furniture, employee wages, marketing, and so on.
As you build your revenue-generating infrastructure, you must keep your investment capital liquid. A goal that is incompatible with obtaining a large loan for your specialized industrial equipment.
Startups frequently lease their initial equipment because it is far more strategic and cost-effective to do so during the crucial first months or years of doing business.
Your company requires you to start up equipment leasing, and you've determined that the advantages of equipment leasing apply to you. The next step is to apply for a lease on equipment. How do you apply for start up equipment leasing?
In this post, we'll look at what lenders want and what you'll need to get approved. Then we'll leave you with a few pointers to help you with your lease application, especially for those equipment leasing with bad credit.
What do I need to get start up equipment leasing approved?
Certain information is required by a lender to help them determine the level of risk involved in providing you with an equipment lease. Here's what lenders look for before approving a loan.
- Track Record in Business
A lender will typically require two years of business financials for equipment worth more than $50,000. However, it is entirely possible for new businesses to obtain lease approval. Lenders typically require personal financial statements and tax documentation for new businesses. A business plan is a huge asset for new businesses looking for equipment lease financing.
- Equipment Specifications
A lender wants to know why your company requires the equipment. What is the equipment's function? How will it help your company? You must demonstrate that the equipment is a good investment.
The equipment itself is important, particularly for new businesses. If the cost of the equipment is low but the resale value is relatively high, the lender faces less risk. The lender's evaluation is also influenced by the possibility of reselling the equipment. A highly customized machine used only in a specific industry poses a greater risk than equipment with broader appeal.
- Your Credit Score
Your credit report is an objective representation of your credit history—how you've handled money in the past. It provides answers to questions that lenders ask when determining risk, such as
- Do you make on-time payments on your bills?
- Have you ever had a payment bounce?
- Have you ever declared bankruptcy?
- How long have you had credit before?
- Have you used all of your available credit?
Your credit report essentially shows lenders how well you manage other people's money.
A new business does not have much credit history, but it is possible to build one. Take out a small credit card or loan and make your payments on time. The same is true for your phone and utility bills. A smaller equipment lease is another way to begin building your company's credit history.
- Your Credit Rating
Your credit score is an assessment of your current financial situation. It demonstrates to lenders the level of risk you represent in comparison to other consumers. Your credit score is determined by the history of your money management, just as your school report card shows your final grade based on all of your tests and assignments.
- A Signatory (Maybe)
Every equipment lease does not require a co-signer. When a lender requires additional security and an extra layer of protection to reduce risk, they may require a co-signer to promise to pay off the debt for equipment loans for startups if the primary borrower is unable to do so (for whatever reason).
Common scenarios in which a co-signer is required include when the company or borrower:
- Does not have a good credit rating.
- Has little industry or business experience.
- Isn't making much money
- Is it a new business?
If the foregoing applies to a business, the lender will usually require the owner to co-sign the lease. It is the owner's promise that they will stand behind their business.
How to Get Equipment Leasing with Bad Credit?
Even if your credit is fair or poor, you can get equipment financing. Lenders will still check your credit history. Some equipment lenders may provide funding to small-business owners with personal credit scores as low as 550, but at a higher interest rate and with a shorter repayment term.
Here are three tips to help you get equipment financing for your business if you have bad credit (a credit score below 630).
- Organize your company's finances
Before you begin comparing lenders and submitting loan applications, you should organize your finances so that you understand your company's qualifications and where you stand in the eyes of lenders.
If you're worried about your credit score, gather any documents that highlight your company's strengths, such as cash flow or annual revenue. Standard application documents such as bank statements, tax returns, profit and loss statements, and balance sheets can also be prepared.
- Improve your application
Other ways to improve your equipment financing credentials before submitting an application include:
- Increase your credit score. You can check your personal credit score and work to improve it in order to help with your loan application. You can check your credit report for errors and dispute them with the appropriate credit bureau, make more frequent payments, and pay down debt.
- Provide more collateral. Although the equipment you're buying serves as collateral for the loan, you may be able to provide additional collateral, such as property or other equipment, to secure the financing.
- Make a larger down payment. A down payment of up to 20% may be required by equipment lenders. If you can make a larger down payment on your business loan, you may be able to increase your chances of approval while also lowering your monthly payments.
- Obtain a co-signer. If you have fair or bad credit, a co-signer with good credit may be able to help you qualify for an equipment loan. However, keep in mind that your co-signer will be held liable for the debt if you are unable to repay it.
- Investigate and contrast various lenders
When looking for bad credit equipment financing, you should shop around to find the best deal for your company.
Because equipment leasing with bad credit typically has higher interest rates and shorter repayment terms than other types of financing, it's even more important to assess the loan's cost and ensure it's something you can afford.
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