If you’ve decided equipment financing is the right move, the next step is understanding how lenders make their decisions — and what you can do to strengthen your application.
Unlike cash-out loans that mostly look at monthly revenue and credit score, equipment financing is underwritten based on both your business fundamentals and the asset being purchased. That’s a good thing — because if the equipment holds value and supports business growth, lenders are often more flexible on other criteria.
🔍 Key Factors Lenders Evaluate
1. Time in Business
Most equipment lenders want to see at least 1–2 years of operating history. A longer track record helps prove stability, especially in cyclical or asset-heavy industries. Startups may still qualify, but often need strong personal credit or a co-signer.
2. Annual Revenue
Most lenders look for at least $100K–$250K in annual revenue. Higher revenue improves your odds, but more important is whether your cash flow can support the monthly payments.
As a rule of thumb, lenders won’t approve financing that results in monthly payments exceeding 10–15% of your average monthly revenue. For example, if your business makes $10,000/month, you might qualify for an equipment loan in the $25K–$60K range — not $250K or more.
3. Cash Flow and DSCR (Debt Service Coverage Ratio)
This is where many borrowers get tripped up — because lenders often calculate a DSCR to assess whether you can handle the loan.
DSCR = Net Operating Income / Total Debt Payments
Let’s say your business generates $100,000 in annual net income and already has $20,000 in debt payments per year. If you’re applying for a new equipment loan with $10,000 in annual payments, your total debt service would be $30,000.
DSCR = $100,000 / $30,000 = 3.33
Most equipment lenders want to see a DSCR of at least 1.25x — meaning you earn 25% more than what you owe across all debts. The higher the ratio, the more confident the lender will be.
Important: existing debt matters. If you already have a working capital loan, line of credit, or MCA, it affects how much new debt you can take on. That’s why lenders often ask for your full debt schedule, not just bank statements.
4. Profitability (or Path to It)
Being profitable helps — but it’s not always required. If the equipment will directly generate revenue or improve margins, lenders may take that into account. For example: a bakery buying a second oven to meet growing demand.
5. Personal Credit Score
Personal credit often comes into play, especially for small businesses. Many lenders want a 600+ score, but some go as low as 550 for collateral-backed deals. Better credit opens up lower rates and better terms.
6. Type of Equipment
The asset matters. Is it brand new? Easy to resell? Specialized? Lenders prefer equipment that holds value and has a clear secondary market. Used equipment or niche machinery may require larger down payments or higher rates.
7. Industry Risk Profile
Lenders evaluate risk based on industry. A trucking company with stable routes will be viewed differently than a new crypto-mining operation buying servers. Some lenders specialize by vertical — and Diogenes can help you find them.
🧠 Final Takeaway: Cash Flow Rules the Deal
You don’t need perfect credit. You don’t even need to be wildly profitable. But your business does need to show it can afford the payments — and lenders will do the math to make sure. DSCR is the yardstick most commonly used.
The stronger your cash flow, the more flexibility you’ll have in both lender options and deal terms.
Want to Know If You Qualify?
Diogenes can help you figure out where you stand — and which lenders will work with you based on your business profile, credit, and the equipment you’re buying.
Next in the series: What Documents Are Required for Equipment Financing (and How Long the Process Really Takes)
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