When you’re in the construction business, finding the right equipment financing solution to fund heavy equipment is crucial to keeping operations going.

In the construction business, heavy equipment is critical to success, but the cost can be brutal to bear. Unless your budget can spare the cash, you’ll have to find the right equipment financing to fund the purchase. Here’s how.

Where to find equipment financing

You can obtain construction equipment financing from banks, credit unions, equipment manufacturing companies, and supply companies, as well as other independent and online lenders. There are three main equipment financing options to choose from:

  1. Equipment leasing
  2. Equipment loans
  3. Small business loans.

Before you choose a financing source and option, you’ll need to assess what kind of construction equipment you’ll need. First, determine what type of machinery, vehicles, or other equipment you want to finance. Decide if you’ll want the newest equipment updated regularly, or if you need something built to last. Once you have determined all of your needs, decide which of these three equipment-financing options will be best for you.

1. Equipment leasing

By leasing equipment, you can save money and have the benefit of getting the most up-to-date equipment. You can expect lower monthly payments than you would with an equipment or business loan. You also won’t typically have to put a down payment on the equipment to get started.

Leasing is more flexible than a loan, and you can often negotiate terms more easily. For instance, if you find at the end of the lease that you want to keep the equipment, you may be able to purchase the equipment at a reduced price. Or, if you find you don’t need the equipment anymore, you can always return the equipment. You’ll have to pay an early termination fee, but you won’t be stuck making payments on something you no longer need.

Your rental payment will be tax-deductible, but leasing doesn’t provide a depreciation tax benefit. Interest rates also tend to be higher than equipment or small business loans, and you also won’t be building equity as you make payments. 

2. Equipment loan

With an equipment loan, you own the equipment from day one. Much like a car, once you repay the loan, your equipment can be used as equity toward a new piece of equipment. At the end of the loan, you may be able to arrange a sale-and-leaseback agreement in which you sell equipment to your finance company for cash, then lease the equipment from the lender.

An equipment loan is often easier to get than a small business loan since credit standards are less strict and rely on other factors, such as experience with equipment. Plus, since equipment has inherent collateral, a lender can always get the equipment back to lend or resell. There are tax advantages to own equipment too—you can enjoy a tax deductible on interest and a depreciation tax benefit over time.

Typically, equipment lenders will require a down payment before you receive equipment. However, depending on your assets or equity, you may be able to avoid putting much money—if any—down first. If you have enough assets, the bank will use those assets as collateral and shoulder the entire burden of financing without requiring a down payment. This means, however, in the event of a loan default, your assets may be seized.

3. Small business loan

Small business loans can be used to pay for equipment as well. The term of the loan should match or be less than the expected lifespan of the equipment. You don’t want to be paying off equipment longer than you use it.

If you opt for a small business loan, look for the lowest annual percentage rates (APR). You can usually get the best rates from banks and credit unions, but you’ll need good credit to qualify. If your credit is less than optimal, your best bet will be with an online small business loan provider. Loans found online will be easier to obtain, but the interest rates are usually higher than those offered by traditional lenders.

Because construction equipment is so expensive and necessary for the industry, you may have to take out very large loans to fund a purchase. This can deplete your ability to borrow money in case you have other business funding needs.

Final consideration

Before you choose an equipment financing option for your construction business, you should also consider the type of maintenance needs the equipment will have. Some equipment leases may offer servicing in case of breakdowns or other malfunctions, but others won’t. Still, if you’re willing to pay someone else to fix equipment or if you can do it yourself, then purchasing equipment could be your best option.

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Cindy leads NerdWallet's small business division, which connects entrepreneurs with advice and tools to answer their small business funding, tax and legal questions. NerdWallet helps empower small business owners with the information and tools necessary to start and effectively run their businesses.