It all starts with the definition of bad credit.
Most equipment financing companies have credit score minimums that they need to adhere to in order to provide your business with financing.
These minimums can range from a beacon score of 650 to 600 and anywhere in between on the personal side and the scoring equivalents on the business side of the credit picture.
So even if your business has good credit, but your own personal credit is only fair to poor, you can get pushed in to the bad credit financing category.
Bad credit equipment financing is provided by equipment financing sources that have a direct or indirect connection to the equipment liquidation market.
Because bad credit scenarios can lead to payment and loan or lease default a higher percentage of the time than good credit, the equipment loan and lease companies that provide bad credit financing will lend on a forced liquidation value.
What that means is that they are equity lenders and they determine the available equity for financing from what the market value for a given asset would be if it had to be sold within a 30 day period.
If you have good equity in equipment that there is a resale market for, then there is a good chance you can qualify for a bad credit equipment financing facility.
The cost of financing is going to be considerably higher for bad credit than for higher levels of credit.
Also, the loan to value lending amounts will tend to be lower and the repayment terms shorter in order to protect the lender against the risk of loss.
Even though the financing costs are higher, for small financing amounts the actual dollar cost of financing can still be manageable and the shorter amortization periods also reduce the amount of interest that will need to be paid over the life of the equipment loan or lease.
The key determinant as to whether the rate is too high or not is the amount of margin you’re going to be generating from the equipment being financed. If the margin is not sufficient to cover the cost of financing and cash flow repayment, then a bad credit equipment financing solution may not fit your requirements.