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Equipment finance with bad credit: it’s not impossible

A bad credit record can be a stumbling block to anyone who is applying for a loan. This can make the process difficult and can affect the outcome of your loan, such as higher interest rate and the need to provide collateral before the bank will approve your application.

 

If you need to purchase equipment for your business, but do not have a good credit score, applying for finance can be a seemingly impossible task. But, if you know what to do, you will likely be approved for equipment finance.

Check your credit record for accuracy

Contact Experian or TransUnion to acquire your credit report and read through it carefully, looking for any inconsistencies. If you see anything that raises a red flag, phone the credit bureaus to immediately remove all negative data, especially if you know you have repaid the debt in question in full. You will then need to ensure that this is changed on your credit history to show the debt is repaid.

Explain your debts

Your chosen bank or financial institution will want to know the exact reasons why you have a bad credit rating, so it is important to have the pertinent facts readily available. They will want to know whether the debt was entirely your fault or not, and what you are planning to do to rectify it. Lenders are already wary of lending money to those with a bad credit record and if you are unprepared to explain your debt or how you will rectify it, your finance application is likely to be rejected.

Offer additional collateral

If you already own equipment or have a property, then you should consider offering this to the bank as collateral. The bank will look favourably on this, as it will lower your risk in their books. They will be able to sell this collateral should you be unable to repay your loan, making granting your loan easier. It is an effective way to gain confidence if you have a bad credit rating, and will work towards securing your loan.

Try an alternative lender

Rather than going to a bank, you could look into going to an alternative lender. These lenders often look at the positive aspects of your business rather than at anything negative. They will see it as an investment rather than scrutinising your credit score, but be sure to research every aspect of your chosen alternative lender. Make sure the terms of the loan are all in order – it may look fantastic on paper, but this does not immediately make it the best choice.

Find a cosigner

Finding and using a cosigner is often one of the best ways to secure a loan. The bank or financial institution you are applying to for finance will see this as a positive endorsement of your willingness to alleviate yourself from debt, but be warned that your cosigner will be taking on part of the debt too. And that can put a strain on relationships if the chosen person is a friend or business partner.

Offer a larger down payment

One way to secure finance with bad credit is to offer the bank or financial institution a larger down payment. If you are having difficulty finding a cosigner, making a larger down payment may help to assure the bank that you are not a high risk applicant. You will, however, have to pay at least 20% upwards, which can be a difficult task for those who are battling with finances already.

Expect a higher interest rate

You will need to take into account the fact that a bad credit rating will incur higher interest rates. You will need to prepare financially for this and cut back on as many expenses as possible in order to make the monthly payments in a timeous manner. Until your credit rating improves, you will be seen as a high risk client and so the bank or lender views lending to you as a liability.

Settle the payment terms of your loan

Read the loan terms carefully and ask the bank to explain anything you may not understand. Usually, a bank will be very straightforward with their terminology, but some lenders may use terms that are confusing or ambiguous. Be sure that it is understood you can only pay back a certain amount and understand the interest rate and fee structure fully before signing anything.

Conclusion

Equipment finance with bad credit can be a hurdle for a business owner who already has tight finances. But, if you are willing to put in the work with the bank, you will likely be approved. Provide all information you need and be prepared to explain your situation, but do not feel judged or ashamed, your bank will be understanding to your situation and you will be able to move your business forward.