Leasing equipment with bad credit

Equipment finance is secured lending. That single fact is why a funder will sometimes approve a lease at a credit profile where nobody would give you an unsecured loan. There is a machine at the end of the deal that can be taken and sold, and the underwriting reflects it.

What the funder is actually reading

Your score is a summary, not the file. Underwriters look at the items behind it.

How the structure changes

Weak credit is usually priced and structured rather than declined outright:

• More money down. A larger down payment, or several payments taken in advance at signing, reduces the funder's exposure from day one.
• Shorter term. Less time for the collateral to fall behind the balance.
• Higher cost. Expect it, and expect to be quoted a payment rather than a rate.
• A personal guarantee, and sometimes a second one. Assume this is required.
• Additional collateral. Other equipment you own, or a blanket filing on business assets.
• Asset restrictions. Funders get more conservative about what they will finance. Common, generic, easily resold equipment is far easier to approve than specialised or custom machinery, because the resale market is the funder's exit.

Illustrative only — what the structure change costs

Structure A, for a clean file: 10% down, 60 months, an implied annual rate of 13%. You finance $54,000, the payment is $1,228.67, and total cash out over the deal is $79,720.20.

Structure B, for a damaged file: 25% down, 36 months, an implied annual rate of 19%. You finance $45,000, the payment is $1,649.52, and total cash out is $74,382.72.

Structure B costs $5,337.48 less in total dollars and demands $420.85 more every month, plus $9,000 more at signing. That is the shape of a weak-credit approval: the funder cuts its exposure and shortens its time at risk, and the price of that is your cash flow rather than your total cost. Both rates are chosen for the example and the one you are quoted will be neither.

Which structure is the problem depends on the machine, not the rate. If it earns $2,500 a month from the week it lands, Structure B is fine. If it ramps over a quarter, Structure B is where the deal fails in month two.

What helps

1. Write the explanation before you are asked. One page: what happened, when, what you did about it, what has changed. Underwriters see a lot of files, and an unexplained derogatory item gets the worst available interpretation.
2. Clear what you can clear. A satisfied judgment or a tax lien with a documented instalment agreement is a different animal from an open one. Get the release documents.
3. Bring bank statements. Three to six months of statements showing real deposits and no cluster of negative days can carry an application further than the score suggests.
4. Show the revenue the machine produces. If the equipment is attached to a signed contract, show the contract. Equipment that pays for itself is the strongest argument in the file.
5. Pick equipment with a resale market. You have more choice here than you think, and it changes the answer.

Two things to be careful about

If the answer today is no, it is usually a no for a stated reason. Ask what the reason is. Under Regulation B, which implements the Equal Credit Opportunity Act, business applicants have rights to a statement of the specific reasons for adverse action in defined circumstances; even where a written notice is not required, most funders will tell you if you ask. The reason is what you fix.

Read the end-of-term structure, not just the payment

Weak-credit approvals are quoted as a monthly payment far more often than as a rate, and the payment hides what happens at maturity. Three common structures produce very different totals behind similar monthlies.

Ask for the total of payments plus the end-of-term amount as one number under each option before you compare anything. A funder that will quote only the monthly is telling you which number it would rather you did not add up.

What to refuse

Refuse an advance fee charged before an approval exists. Refuse to let a broker submit your file to funders it will not name. Refuse a blanket lien on all business assets in exchange for financing one machine — on a secured equipment deal the collateral should be the equipment, and a funder that wants everything you own is pricing your next application too.

Refuse, also, to sign a lease without reading the hell-or-high-water clause. It says your payments continue regardless of whether the equipment works or whether the vendor delivered what was promised. It is standard and it is generally enforced, which is why the machine you finance should be the machine you inspected.

One thing to do before you apply

Pull your own personal credit report and your business credit files and read the derogatory items against your own records. A meaningful share of what stops these deals is simply wrong: a settled account showing open, a lien released two years ago that never updated, an account belonging to someone with a similar name.

Disputing an error on a consumer report has a defined process under the Fair Credit Reporting Act, described at consumerfinance.gov. Business files sit outside that statute, so those corrections have no clock behind them — a reason to start now rather than mid-application.