You need to have money to make money. When it is time to buy the necessary equipment, and there is no sufficient money, where do you get the funds? Enter equipment financing, a way of funding business equipment purchases. “Equipment” generally includes physical assets from office-related items such as printers and desks, to farming-related equipment such as pick-up trucks and tractors.
Like many kinds of loans, you will need something to serve as collateral to secure the loan. With equipment loans, buying the item can act as collateral, just like a car loan. If you default on the debt, the equipment financing company can repossess the asset you bought. Equipment loans do tend to be more challenging to qualify for. In most cases, you will need a good credit score and a demonstrated ability to make your loan payments. But there is no doubt that there are numerous advantages of equipment financing, including preservation of capital, tax advantages, and, most importantly, you do not need to come up with 100-percent of the required funds at the time of purchase. As one of the most relevant factors to the overall financing process, knowing what kind of rate to expect when financing that equipment is something most business owners want to know before deciding to outright purchase the equipment they need for their business.
Equipment financing interest rates
Typically, equipment loan interest rates range between 2 and 20-percent. Whereas the variance is as wide as that tractor you are financing, it is only because the rate you get mainly depends on your credit score and how long you have been in business. The higher your credit score, the higher the chances of getting a lower interest rate. When it comes to equipment loan terms, they range from 12 to 72 months and vary by loan option and equipment financing company.
How do I qualify for the best equipment financing rates?
The main factor considered by financing companies when applying a rate to any kind of loan is the borrower’s level of risk. Typically the lesser the risk you present, the lower the interest rates you will get. If you have been operating in business for a long time and you have a regular, high revenue, you will present far less risk to a lender than somebody who just started a company without stable, annual revenue. The interest rate on your loan is also dependent on which lender you choose to do business with, and might also alter based on:
- The amount of money you want to borrow
- The kind of asset or assets you wish to buy
- If you own a property
- Your time in business
- Your personal credit history
- The monthly revenue of your business
- The term you are applying for
- Your business credit history
When evaluating your application, lenders will consider five different factors to assess your level of risk. Below, you can see what the factors are and how they might affect your application. Here’s how financing companies assess your equipment finance application:
- Capacity – Your capability to repay the lease or loan from an assessment of your income and your current debts.
- Credit rating – A list of bankruptcies, defaults, and related information, and is usually retained for a period of seven years.
- Capital – This is any down payment put toward the purchase of the assets you wish to fund. A deposit lowers the debt, and thus the risk to a lender. If you are renting and do not own a home, lenders might ask for a deposit.
- Collateral – This is any asset that is utilized to secure the debt – whether you are required to supply a collateral for equipment finance will be based on the type of finance you choose. Some assets – like a delivery truck – can be used as collateral. Other assets – like an office fit-out – can not.
- Conditions – The health of your business and what you will use the funds for. Lenders might also look at industry trends and anything that might affect your ability to repay the loan. This is a projected assessment of how the lender believes your company will perform over time.
Does the type or age of equipment affect the interest rate?
The kind of asset you wish to fund, and the age of that equipment, will also determine how a lender applies an interest rate to your loan. This is vital to understand for any kind of equipment finance loan, but mainly if you are considering loans for multiple assets of different types – like leased office equipment, a business vehicle, and office fit-out. For example, a vehicle is a relatively secure asset developed to remain in good working order for a considerable amount of time. If you could not meet your repayments, a lender can reclaim the vehicle and regain a significant portion of their losses.
On the other hand, electronics are not as reliable as a car. The value of electronics can drop significantly in only a few years since they have a shorter operating lifespan. This is best demonstrated by non-reclaimable assets acquired through business fit-out finance: since there is no way for a lender to reacquire a fit-out from a borrower, this kind of equipment presents the highest amount of risk.
How can I compare interest rates for equipment financing?
The main reason why people look to compare interest rates on equipment finance to make sure they get the lowest monthly payment, best deal, and the lowest total repayment amount possible. Whereas an interest rate is a strong sign of your regular and total repayments, there are other factors to consider as well, like any ongoing or initial fees that might affect your total loan amount. Each financing company will have different finance products, rates, and approval criteria. The best way to compare the interest rates of equipment financing is to use a financing calculator. An equipment loan calculator is an estimation tool that offers a range of possibilities based on the term selected and creditworthiness. It is advisable you experiment with different repayment periods and interest rates. Terms can be modified on the equipment finance calculator to decrease or increase your payment.
Why fixed interest rates are usually the best for equipment loans?
The majority of commercial equipment financing options have fixed interest rates and for a good reason. With a fixed interest rate, the borrower can predict exactly how much they will be paying each period and how much your funding will cost you over the long run. This information enables you to fine-tune your budgeting and financials to fit your business needs, and it also eliminates any surprises from the equipment financing process.
With equipment financing, most company owners know exactly how much money they require. They are looking to obtain a specific type of equipment and use it for a particular length of time. Typically, fixed interest rates line up perfectly with these businesses’ need for financial predictability. When mixed with fixed interest rates, equipment leases and loans help businesses of all types attain accurate budgeting and financial planning.
Generally, it is best to match the financing term’s length to the useful lifespan of the equipment you are purchasing. When you combine an appropriate financing term with a fixed interest rate, you set your business up for accurate budgeting, depending on established best practices. Note that equipment financing options with variable interest rates still have their uses. Many companies use these lines of credit to finance inventory and receivables on a short-term basis, and your business might want to consider doing the same where it makes sense.
Variable interest rates explained
If your equipment loan has a variable interest rate, then the interest rate will move up or down based on the market changes. Usually, the variable interest rate is linked to an index rate, a benchmark rate based on market factors. The benefit of variable interest rates is that if the market rates decrease, so will your equipment loan’s interest rate. Of course, do not forget that the reverse is also true; if market rates go up, so will your interest payments.
In summary, to the best answer to the question: how much is the typical equipment financing interest rate, the answer is that it all depends on your means in which you acquire the equipment. But to be more exact, the US’s best equipment rates start from 2.00% and are fixed for the loan term. To obtain the best – i.e., lowest – rate on equipment finance, a borrower will have to present as little risk to the lender as possible. As you have seen above, if paying the lowest total loan amount is your goal, you will also need to consider monthly fees and interest rates.