No Credit Check Equipment Financing: Is It Possible?
Ezra Cabrera | November 13, 2023
Key Takeaways
Equipment loans can help businesses finance the equipment they need to operate efficiently. However, those looking for no credit check equipment financing may be disappointed to know that they’re less likely to find a lender that offers one.
Credit checks are an important component of loan applications since they tell the lenders about your behavior as a creditor.
Small business loan options such as invoice financing, purchase order (PO) financing, and merchant cash advance (MCA) can be excellent alternatives to no credit check equipment financing.
Equipment plays a crucial role in the productivity of most businesses, but it can also be one of the most expensive investments a company makes. If you don’t have the cash to pay for business equipment upfront, applying for business financing like equipment financing is a great way to get the funds you need to obtain these valuable assets.
While no-credit-check equipment financing doesn’t exist, there are alternative lenders who will work with bad credit borrowers. In this article, we’ll explore why a credit check is vital in the equipment loan application process and discuss the different alternatives to no-credit-check equipment financing.
That said, credit scores can be a roadblock to receiving equipment loan approval for many business owners. Bad credit or insufficient credit history can preclude you from qualifying for equipment financing with great terms. If you do apply, the hard inquiry can negatively impact your score even more.
What is Equipment Financing?
Equipment financing is a helpful tool for businesses to acquire new or used equipment without a large upfront cost. It's like getting a loan specifically for business machinery, tools, or furniture. There are two main ways equipment financing works: loans and leases.
An equipment loan is similar to a car loan. You borrow the money to purchase the equipment and repay it with interest in fixed monthly payments. Once the loan is paid off, the equipment belongs to your business.
An equipment lease is more like renting the equipment. You make monthly payments to use the equipment for a set period, usually a few years. There are different types of leases, but with some, you might have the option to purchase the equipment for a set price at the lease's end.
Why Do Lenders Check Your Credit Report When Applying for Equipment Financing?
Those looking for an equipment financing resource that doesn’t require a credit check may be disappointed to know that there is no such thing. All lenders have to pull your credit report as part of the process.
So, why do they care so much about a borrower’s credit standing?
Think about it from the lender’s perspective. They want to know that you’ll be able to make loan repayments on time and in full by the end of the financing period. A credit check is how they assess your credit and repayment behaviors to gauge their level of risk in lending to you.
Your credit report shows all your financial activities, including your debt accounts and their current status, the payments that go toward each account, and more. Banks and traditional lenders check your credit report to assess how responsible and reliable you are in making repayments and whether or not you tend to default on your loans.
Your credit score is included in your credit report. Although it’s just a three-digit number, it can tell a lot about a person’s credit behavior. Essentially, the higher the number is, the more likely you are to make repayments on time and repay the loan in full. In turn, lenders will see you as an ideal borrower and be more likely to extend credit with excellent terms to you.
The opposite, however, won’t work favorably for you. Low credit scores could indicate irresponsible payment behavior and a high chance of default, making you a high-risk borrower. While some lenders may still be willing to work with you, you can’t expect that their terms will be as flexible.
Getting Equipment with Bad Credit or Insufficient Credit History
We’ve established that there are lenders out there who will be working to work with you despite a bad credit score, but you will have to show that you’re doing well in other financial aspects.
Each lender has its own criteria it follows when evaluating a borrower’s qualifications. Credit scores are only a part of that criteria. Here are the other factors that lenders look at when assessing your eligibility for an equipment loan and structuring its terms:
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1. Revenue
Revenue is your company’s total income. Some lenders won’t require a minimum annual income to qualify for equipment loans, while others will (typically $100,000 or more).
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2. Time in Business
Your time in business can show the lenders a record of how you’ve weathered storms throughout your tenure as a business owner. The longer your track record, the better. At the very least, equipment financing companies may require a business to have been in operation for a minimum of two years.
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3. Down Payments
Lenders usually require down payments as security for the loan. In some instances, especially when the borrower has a good credit background, they may not require a down payment. However, if the business is considered high risk, they could ask for as much as 30% to 50% down payment.
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4. Personal Guarantee
More often than not, equipment financing requires the business owners to sign a personal guarantee agreement. A personal guarantee is an individual’s legal promise to repay the loan using his/her personal assets in case the business cannot fulfill the repayments. Be sure to check this when reviewing the loan contract, as some lenders may hide this within the contract’s fine print.
Where to Apply for Business Equipment Financing
There are a number of places where you can get equipment loans. Here are a few options:
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Online Lenders
There are a number of online lenders offer equipment loans or leases. These lenders typically have a quick and easy application process, and you can often get approved for a loan within a few days. Some popular online lenders include:
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Equipment Vendors
Many equipment vendors offer financing options, including equipment loans and leases. This can be a good option if you're already familiar with the vendor and know they have good-quality equipment.
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Equipment Leasing Companies
Equipment leasing companies offer another option for bad credit equipment financing. When you choose an equipment lease, you don't own it but make regular payments to use it. This can be a good option if you don't need to own the equipment outright.
Alternative Funding Options to No Credit Check Equipment Financing
Even though business equipment financing is a poorer fit for a lending model that doesn’t involve credit checks for some reason (i.e., equipment value depreciation), there are other lending options that may skip the credit check application.
If you can’t qualify for equipment financing, or you’re not willing to risk a hard credit pull, you should consider alternative financing that overlooks the credit check aspect of the loan application. Check these options out:
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Invoice Financing
Invoice financing allows businesses to use their customer’s outstanding invoices as collateral for a loan. The invoices should be less than 90 days old to become eligible for financing. If approved, the company can get a cash advance of 80% to 100% of the total invoices being financed.
In this case, the accounts receivables act as the collateral for the financing, and the business retains control over the ledgers and payment collection. However, if the business defaults on the payment, the lending company will take over the accounts receivables and collect the customer’s payments.
With invoice financing, the financing company's primary concern is the credit scores of the borrower’s customers. In fact, they’re more likely to check your customer’s credit rating than yours to determine the invoice’s qualification for financing. As a result, you may have more luck finding a lender that will forego a credit check on you or your business.
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Purchase Order Financing
When a company receives a large order from one of its customers, funding the project out of pocket could create a cash flow strain on the company. To avoid cash flow issues, business owners apply for purchase order financing to help fulfill and deliver the order to their customers.
Unlike other types of financing, wherein the borrowers receive the cash up front, lenders offering purchase order financing transfer the funds to the suppliers directly. The suppliers then start manufacturing the products and, once completed, deliver them to the customers.
In most cases, lenders do not see the need to perform a credit check on the borrowing business because the financing is backed up by confirmed purchase orders from customers. They might require a credit check for your customers, but they usually don’t pull a hard inquiry into the borrowing business’ credit report.
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Merchant Cash Advance
Merchant cash advances are primarily for businesses that process large amounts of monthly credit card sales. With this type of business financing, the lender advances cash to the small business owner, which the lender then pays back using a percentage of their company’s credit card sales. Depending on the terms you and the lender agree to, the lender may take a portion of your daily, weekly, or monthly credit card sales as payment for the cash advance.
Again, the lender in MCA doesn’t usually require a credit check because the loan repayments are mainly based on your business’s future credit card sales.
What’s Next for You?
Credit checks are crucial in business equipment financing because they allow lenders to evaluate your behavior as a borrower and guide them in setting the terms for your equipment loans. If you’re looking for no credit equipment financing, you won’t be able to find a lender that offers one.
This shouldn’t stop you from pursuing equipment financing for your company, though. Alternative lenders might still be willing to work with small business owners with bad credit or lack enough credit history. Or, you can try finding a lender that only performs a soft credit check if your main concern is hurting your credit score after a hard credit inquiry.
If you still can’t qualify, you may also consider other financing options like invoice financing, factoring, purchase order financing, and merchant cash advance (MCA). These options usually don’t require credit checks, so you’ll still have a high chance of qualifying even with a bad or poor credit history.
Common Questions. Straight Answers.
The credit score requirements to buy business equipment varies depending on the lender and the type of financing. Some lenders may accept a minimum credit score that's as low as 500 for equipment loans, while others prefer scores around 660 or higher for term loans.
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