Key Takeaways
- Understand the difference between capital leases ($1 buyout) and operating leases (FMV).
- Equipment financing can offer tax benefits under Section 179.
- Approvals are faster than bank loans because the equipment serves as collateral.
Full Guide
What Do Equipment Lenders Look For?
Good news: qualifying for an equipment loan is often easier than getting a traditional bank line of credit. The equipment itself serves as collateral, which reduces lender risk.
That said, lenders still evaluate your application carefully. They focus on the 5 C's of Credit, with particular emphasis on Collateral (the equipment) and Capacity (your ability to repay).
The 5 C's of Credit
- Character: Your credit history and payment behavior
- Capacity: Your ability to repay based on cash flow
- Capital: Your business equity and financial reserves
- Collateral: The equipment securing the loan
- Conditions: Economic factors and industry trends
Below, we break down the key factors that determine whether you'll qualify for business equipment financing.
Credit Score Requirements for Equipment Loans
Your credit score is the first thing lenders check. It determines your interest rate and approval odds.
Credit Score Tiers Explained
700+ Excellent
Qualifies for prime rates and instant approvals. Banks actively compete for your business. Expect rates as low as 6-8% APR.
650-699 Good
Standard rates with very high approval odds. Most equipment financing applications in this range get approved. Rates typically 9-12% APR.
600-649 Fair
Tier 2 rates apply. Many lenders require a 10-20% down payment for commercial equipment financing. Rates range 13-17% APR.
Below 600 Challenged
Known as "story credits." Approval is still possible if you have strong cash flow or extensive business history, but expect higher rates (18-25% APR). See our guide to equipment financing with bad credit for strategies to improve your approval odds.
Pro Tip: Check your credit report before applying. Fixing errors can boost your score by 20-50 points. Get free reports at AnnualCreditReport.com from all three bureaus: Experian, Equifax, and TransUnion.
Time in Business: Why It Matters
Lenders view business age as a key risk indicator. Here's how it affects your business equipment loan application:
| Business Age | What to Expect | Requirements |
|---|---|---|
| 2+ Years Established | Lower interest rates, higher loan amounts, faster approvals, more flexible terms | Credit score 650+, 2 years tax returns, positive cash flow |
| 1-2 Years Newer | Moderate approval odds, loan caps $50K-$150K, may need down payment | Credit score 680+, bank statements, business plan helpful |
| Under 1 Year Startup | Limited options, loan caps $25K-$50K, higher rates, larger down payment | Credit score 700+, personal guarantees, possible co-signer, 20-30% down |
The Magic Number: Two years in business is the threshold where banks and traditional lenders view you as "established." If you're close to this milestone, consider waiting a few months to unlock better rates and terms.
Cash Flow Requirements
Lenders need confidence that your business generates enough revenue to cover the new payment. They use a metric called the Debt Service Coverage Ratio (DSCR).
Understanding DSCR
Most lenders look for a DSCR of 1.25x or higher. This means for every $1 of monthly debt payment, you need $1.25 in available income.
Real-World Example:
Your new equipment loan payment = $2,000/month
Required monthly income = $2,500/month
Formula: $2,000 × 1.25 = $2,500
Note: This is net operating income after expenses, not gross revenue. Lenders subtract your existing debt payments and operating costs first.
Ways to Strengthen Your Cash Flow Position
- Pay Down Debt: Reduce existing obligations before applying to improve your DSCR calculation.
- Time It Right: Apply after your strongest revenue month to show better cash flow patterns.
- Show Seasonality: Provide documentation explaining seasonal patterns if applicable to your industry.
- Larger Down Payment: A bigger down payment reduces monthly obligations and improves your DSCR.
Documents Needed for Equipment Financing
The documents you'll need depend on your loan amount. Here's what to prepare:
Small Business Loans Under $250K
Most lenders offer "Application-Only" programs for smaller amounts. You'll typically need:
- Completed credit application
- Equipment invoice or quote
- 3 months of business bank statements (sometimes waived for strong credit)
- Driver's license or government ID
Processing Time: 24-48 hours for approval, funding in 2-5 business days
Commercial Equipment Loans Over $250K
Larger commercial equipment financing requests require a full financial package:
- 2 years of business tax returns
- 2 years of personal tax returns (for guarantors)
- Current Balance Sheet
- Current Profit and Loss Statement
- Debt schedule listing all existing obligations
- Business plan (for newer companies)
Processing Time: 5-10 business days for approval, funding in 1-2 weeks
Expert Tips to Boost Your Approval Odds
Follow these strategies to maximize your chances of getting approved for business equipment financing:
Before You Apply
- Review Your Credit Report: Request free copies from all three bureaus. Dispute any errors you find. Even small mistakes can cost you thousands in higher interest.
- Know Exactly What You Need: Vague requests for "working capital" raise red flags. Specific equipment purchases with quotes are easier to approve.
- Gather Documents Early: Having everything ready speeds up the process and shows lenders you're organized and professional.
During the Application Process
- Be Honest About Your Situation: Lenders appreciate transparency. If you have challenges, address them upfront with explanations.
- Explain the ROI: Show lenders how the equipment generates revenue. Will this equipment loan help you take on more jobs? Reduce labor costs?
- Apply with Multiple Lenders: Rates and approval criteria vary. Our lender comparison tool can help you find the best fit.
Ready to get started? Check your eligibility in minutes without affecting your credit score, or use our equipment financing calculator to estimate your monthly payments.