Construction equipment financing: A guide for contractors.

If you own a construction business, having the right equipment is central to your company’s profitability and success. Construction equipment financing can help your business acquire the machinery you need while preserving working capital for other priorities such as payroll and operations. Whether you’re acquiring your first piece of heavy equipment, looking to expand your fleet, or comparing your options for an upcoming project, this guide will help you understand how equipment financing works, what your options are, and what lenders typically look for so you can make the right financial decisions for your business.

How does construction equipment financing work?

Businesses can acquire heavy machinery, vehicles and other construction equipment in several ways, including financing with a loan, leasing, or purchasing equipment outright.

Regardless of the approach, the process typically begins by identifying the equipment you need and determining which option best fits your budget, cash flow and long-term goals.

Nick Hadley, senior vice president for Commerce Bank’s engineering and construction services group, says, “At its core, construction equipment financing is about matching the way companies pay for equipment to the way the business generates cash. We start by talking with organizations to better understand their capital expenditure needs for the year, and how that aligns with the type of equipment that they’re looking to finance. That conversation helps us determine the type of financing they’ll need.”

Equipment loans vs. leasing vs. buying: Which is right for your business?

According to Hadley, when having financing discussions with construction businesses, “the number one narrative is around cash flows, since the general operating cycle of a construction company can be very lumpy because of the seasonality of the business and the types of projects that contractors do. So we’re keenly focusing on cash flow projections.”

Here’s a rundown of the options:

Equipment loans.

With an equipment loan, your business borrows money to purchase the equipment outright. The lender holds a security interest until the loan is fully repaid, when the business owns the equipment.

“We can either provide funding directly to the equipment vendor for the purchase of the equipment — which is our preference because it allows us to take a better lienholder right to the equipment — or we can fund the equipment in arrears, where a business either pays with cash or draws on their line of credit, and we refinance that money out to them at a later point,” Hadley says.

Small Business Administration (SBA) 7(a) and 504 loan programs also offer government-backed financing options for eligible businesses, although eligibility requirements, loan limits and terms vary by program.

Keep in mind that SBA loans may involve a longer approval process than conventional equipment financing, which can be a consideration if equipment is needed quickly.

Equipment leases.

Equipment leasing options enable your business to get the equipment you need without a big upfront cost. Depending on the lease type, you may have options to purchase, return or continue leasing at the end of the term. Leasing is often the best option if you don’t know whether you’ll have a need for a piece of equipment over the long term.

Finance leases let businesses claim depreciation and interest deductions as though they own the equipment, while operating leases shift ownership tax benefits to the bank in exchange for lower lease payments that are typically fully deductible as a business expense.

“If we own the asset and keep the depreciation, that lets us lower the all-in cost,” Hadley says.

Equipment purchases.

This option allows your business to buy the equipment with cash reserves. There are no financing costs or ongoing obligations, but you absorb the full capital impact up front. Hadley says very cash-heavy contractors may prefer to use their own cash to purchase equipment. “Paying cash usually gives a better ROI on that asset because as soon as you add interest expense, the ROI on the equipment goes down.”

The tax benefits of equipment financing.

How you choose to finance construction equipment can be as much a tax strategy as a purchasing decision. With a traditional equipment loan or finance lease, you own the asset and can usually capitalize and depreciate it on your own books. Thanks to tools such as Section 179 and the special depreciation allowance opens in a new window, many contractors can expense a large portion — sometimes all — of an equipment purchase in the year that the equipment is placed in service. That accelerated write-off may reduce taxable income in the year the equipment is placed in service, potentially freeing up cash for hiring, materials or additional projects, even though your actual payments are spread out over several years.

The picture changes with a tax lease. In that structure, the lender retains ownership of the equipment and takes the depreciation, but passes some of that tax benefit back to you through lower rental costs.

If your business doesn’t need as much depreciation right now — because taxable income is low or your ownership structure limits the impact — a tax lease can effectively let you trade the right to take depreciation for a lower monthly payment or lower effective cost. If your business cycles through equipment frequently or wants to preserve cash flow for job costs and payroll, that trade-off can make sense.

Consult a tax advisor for further guidance.

Qualification requirements: Credit score, time in business and down payment guidelines.

Equipment financing can often be more accessible than general business loans because the equipment serves as collateral.

Credit score.

Construction businesses with less-than-perfect credit scores may qualify if they have strong cash flow or can make a meaningful down payment.

While requirements vary by lender, a personal credit score of 650 or higher may improve a borrower’s chances of qualifying for conventional equipment financing, although lenders consider the full financial profile of the business and its owners. Scores lower than that may still qualify through alternative or SBA-backed programs, often with added collateral or down payment requirements.

Debt load.

Hadley says lenders also typically consider a company’s existing debt load. “We’re looking at how much debt a company already has compared with how much money it brings in,” he says. “As a company takes on more debt, it becomes harder for them to keep up with their loan payments.”

This is especially important in construction because business can be highly unpredictable. “Projects can often slow down, get delayed, or fall through completely,” Hadley says. “We want to make sure customers have enough financial cushion to handle those ups and downs and still be able to repay what they owe.”

Business tenure and leadership experience.

Two years of operating history is the standard benchmark for the most favorable rates and terms. Newer businesses may still be able to secure financing, but might have higher rates or larger down payments to offset the risk.

Lenders don’t just look at how long a company has existed — they evaluate how it performed under pressure, Hadley says. “We look at a historical range because we want to see how they managed through depressed times versus when times were good.”

That scrutiny extends to leadership, especially for newer entrants. “There’s always that one-off entity that seems to pop up out of nowhere, but historically what we’ve seen is that their leadership team has come from another successful organization and they’ve decided it’s time to go out on their own,” Hadley says. “So we’re looking at not only the time in business, but really the strength behind either the owners and/or the management team.”

Down payment requirements.

With equipment financing, down payments generally range from zero to 20% of the purchase price. Borrowers with strong credit and an established track record may qualify for 100% financing, while newer businesses or those with credit challenges should plan for a 10% to 20% down payment, or potentially more.

Types of construction equipment you can finance.

Financing is available for a range of construction equipment including excavators, skid steer loaders, backhoes, wheel loaders, bulldozers, compact track loaders, cranes, forklifts and other heavy machinery used to build, grade, excavate and transport materials.

“We offer financing for both new and used equipment and treat them fairly similarly,” Hadley says. “The key is structuring the term so the loan repays before the end of the asset’s useful life.” The risk profile changes with highly specialized machinery where there are only a few potential buyers. “You should expect different down payment requirements and tighter structures on those types of specialized assets,” he says.

Payment structures for construction equipment financing.

According to Hadley, a fixed monthly payment provides the predictability that contractors need. “It’s a known cost of capital and it’s a known debt service that you’re able to plan for,” he says. Seasonal or customized payment plans (higher payments in peak season and lower in off-season, for example) may also be available for companies that experience big cash flow fluctuations. Hadley says some contractors want to stretch terms well past the realistic useful life of the equipment, while others “get really aggressive and want to shorten it so much to a point where it could impact the overall general cash flow.”

“In the construction industry, it’s not if — it’s when — you’re going to have some impact to your cash flow from a particular job or two,” he adds. “We’re really trying to plan for a worst-case scenario to make sure that we’re advising as best as possible on the appropriate financing structure.”

Apply for construction equipment financing.

Before applying for construction equipment financing, update your business plan so it clearly explains your company, the type of work you perform and how the new equipment will support growth, improve productivity or help you win more projects. Be prepared to show how the purchase fits into your long-term business strategy and your ability to generate revenue.

Next, gather the financial documents lenders typically require, including three years of profit and loss statements, balance sheets and business tax returns. Depending on your relationship with the lender, you may also be asked to provide bank statements, accounts receivable reports, contracts or a list of current and upcoming projects that demonstrate your company’s financial strength and steady workload.

Finally, review your financial statements with your accountant before submitting your application. Lenders use these documents to evaluate your cash flow, profitability and ability to make equipment loan payments, so it’s important they accurately reflect the financial health of your construction business.

Learn more about equipment financing at Commerce Bank and the options available to you.