Heavy equipment financing makes getting that critical piece of equipment you need to run your business much easier. While a traditional small business loan can often be used for many business purposes, equipment financing gives you the funds to purchase or lease the equipment you need.
The difference between heavy equipment financing and a traditional small business loan is that equipment becomes an asset that the lender can re-sell if you default, making it a safer bet for them, and business loan amounts are likely higher, which can make them more difficult to get.
By showing up to the lender prepared with the knowledge of what makes you a high- or low-risk borrower, you could increase your chances for approval. With this knowledge, you may be able to show how you can pay back the loan or reduce their risk. Plus, you will know what and how to negotiate so that you don’t inhibit your ability to get financing in the future.
Here are seven ways you can prepare to get a heavy equipment financing loan while also setting yourself up for future success.
Knowing Resale Values and Market Demand by Equipment Type
By having the resale value of the equipment and market demand trends in your application, you help build the lender’s confidence that, if you default, they will have an easier time recouping their losses. You’ll stand out as someone who is better prepared and potentially more in tune with their finances, which can be appealing to some lenders.
It’s pretty easy to do this as you already know the amount of money you need for the new heavy equipment, but not all borrowers come prepared with resale values and a market demand analysis.
To take it a step further, bring two or three options for the heavy equipment that will meet your needs and show what the current resale value is and what the market demand for each will be. You can explore new, used and current-year options, if available, or try a few brands if there is more than one manufacturer.
By tracking the marketplaces where heavy equipment is typically sold, you’ll be able to see (and show your lender) the following key details:
- Time on the market
- Bidding wars that occur in heavy equipment auctions
- The total sale price compared to new and retail
- If the prices are increasing or decreasing
- How many ads are being run for used vs. new equipment in trade publications and what the trend is
By coming prepared in this way, you may be able to get approved (and for a higher loan amount). This way you can get the funding for the brand and model of heavy equipment you want vs. settling for a lower amount and your second choice.
Future-Proofing the Lender’s Risk on the Equipment
By sharing how long the heavy equipment will be technologically superior or relevant, you’re showing how feasible it will be for the lender to recover losses if you default. Here’s an example. If the loan is for three years and the manufacturer of the machinery releases a new model or upgrade every five, and the model you’re purchasing was just released, this keeps your purchase (and the lender’s investment) easier to resell to others looking for an upgrade.
Lenders are not agriculture or construction experts and likely do not track how often new equipment is released or when technology gets updated. You as the borrower have this information and can use it with your application.
Specify What Is Listed on UCC Filings
UCC filings are public records that lenders create to show which assets they can claim if a borrower defaults on their loan payments. With heavy equipment loans, they may list all of your heavy equipment including machinery that you already purchased and paid off.
If you have a good business credit score or a track record of fiscal responsibility and sustainable cash flow, ask what will be included on the UCC filings. You can request they only include specific SKUs or pieces of machinery and not use a generic statement that would put your already-paid-for assets at risk.
By not having current assets or keeping specific assets off of the UCC filing, you can use these as collateral for future loans or in cases where you need emergency loans like for a flood, a fire, or power outages that could stop production.
Market Growth Statistics
If your industry is expanding, or the customer base is expected to grow substantially, this can be appealing to lenders as you’ll likely be growing year over year in revenue, which means you’ll have the money to pay back the loan.
You can check out the Bureau of Labor Statistics for trends as they are listed alphabetically by industry and NAICS code here.
Here’s an example. If your customers produce crops and you produce the storage and shipping items for them, look to see if their industries are expected to grow. If yes, there will be more demand. By having the heavy equipment loan to buy production supplies, you will be able to support the increasing demand and may have a better chance at landing larger contracts and customers.
If you create a growth model and show how the new machinery lets you meet future market demand, and add in projected revenue, this could make a strong case that you’re business savvy and ready to grow. And that could lead to a loan now and financing in the future as your business expands.
Pro-tip: If the new machinery meets next year’s output requirements because production increases, sell the current equipment to help repay the loan or to take a smaller one so you have less debt.
Use New Client Contracts to Your Advantage
If you have inked deals with new accounts or larger orders, it shows your company has the demand and potential to cover the interest payments from the loan. The only thing stopping your growth is the lack of machinery or equipment.
By incorporating these deals into your heavy equipment financing application, you help provide evidence that you are able to cover the cost of the loan and may reduce any concerns about your ability to pay back the loan.
Other items you can try adding in could be letters of intent (LOIs), memorandums of understanding (MOU), and proposal shortlists where there is a likely chance you’ll be selected.
Knowledge of Being Allowed to Sell the Equipment
Be sure you read the terms and conditions of the loan as not all lenders will allow you to sell the heavy equipment without their permission. Even if you have a buyer that will give you enough to pay back the loan in full, the lender may say no as they won’t get interest payments.
Look for the resale language in the contract and see if you can get it removed or make it more flexible. If the bank feels you are a lower-risk borrower and wants you back for future business loans, they may agree to this. If not, you may have an option with a prepayment fee.
Prepayment fees let you sell the equipment to pay back the loan and use any additional money as you see fit. With the payment of the fee, the lender still comes out ahead even if there is less interest to collect on. An added benefit for the lender is they’ll have more cash on hand for new loans and less paperwork for collecting on existing ones.
Funding the Deposit
Heavy equipment loans normally require a down payment or deposit between 10% and 20% of the total loan amount. If you know you’ll need heavy equipment financing in a couple of years, as you have plans for a future expansion, now is the time to start saving so you have money for the deposit.
If you have a farm and are allowed to lease land for a restaurant, housing, or a smaller farm to grow crops, the rent you collect from leasing your land can be used for the down payment. The same goes for having a building that is zoned for business use. If you only use part of it and there is office space, lease the other spaces out to small businesses that need a physical location.
Here’s another example. Let’s say you grow olives, almonds, and grapes in Napa, California. Look to see if your AVA is an in-demand region for wineries that buy excess or quality grapes. You can grow the grapes and sell them to the winery so they can produce the product they sell. Also, hair oil and shampoo companies may need almonds and olive oil for their products. Reach out and let them know how you can help them meet higher demand levels as their brand expands and product lines grow.
The goal is to find where you can expand your output without impacting your current operations, or utilize assets that are not currently being used to earn additional revenue so that you can make the deposit in the future.
In conclusion: By showing up prepared, knowing how and what you can negotiate, and being able to reduce your perceived risk as a borrower, you may have a better chance at getting the money you need for new heavy equipment.
