Equipment financing rates can vary significantly across lenders and leasing companies, as well as between asset kinds and locales.
This is largely attributable to the industry’s diversity of financing options and the way each lender or lessor targets the market and pricing their funds according to risk.
While funder-specific variables may affect effective loan rates, there are certain general rules you may follow when determining the type of financing rate you should pay.
Equipment Financing Costs Will Vary Depending On The Size Of The Transaction
For example, the rate on sums less than $200,000 is often greater than the rate on bigger borrowing or leasing amounts.
Cheaper Rates Are Frequently Countered By A Lengthy Application And Funding Process
For instance, if you were to obtain a small company equipment loan from a bank, the lowest possible financing cost would be prime + 3%. However, in order to qualify for that rate, you will need to pass a rigorous application process that will require you to have excellent credit and a substantial personal net worth to guarantee the loan…and the loan to value will likely not exceed 75%.
If you want a higher loan to value, the rate will almost certainly be slightly higher to compensate for the financing source’s relative risk.
For example, the majority of Equipment leasing businesses like Crestmont Capital will lend leverage to clients with “A” credit at or near 100% of the asset acquisition cost. However, the effective rate of borrowing is typically slightly greater than what they might qualify for from a bank or institutional lender.
The slightly higher rate offered by a small ticket leasing company not only provides greater leverage but also a faster turnaround time than bank financing.
You Must Weigh Cost, Leverage, And Timing Considerations
Businesses that have been in operation for less than three years or that have some degree of credit or financial difficulties will also face higher borrowing costs as a result of the increased risk of loss to any financing business that authorizes funding.
There are also Equipment leasing rates that are comparable to or lower than bank rates, but these are typically reserved for businesses with exceptionally strong credit profiles or for situations in which the equipment manufacturer or dealer has provided the finance company with some type of risk mitigation, allowing the finance company to offer the customer a lower effective rate.
Additionally, the type of equipment might have an effect on the effective lending rate. The more a piece of equipment is viewed as a commodity with a sizable and predictable resale market in terms of resale value and time required to execute a transaction, the lower the risk associated with that asset.
Finance businesses will also have geographic and sector preferences when it comes to their lending and funding requirements, offering preferential rates for places and industries that meet that criteria.
The primary point here is that determining the optimal financing option for a given situation is not always evident until all relevant elements are addressed.
By considering what equipment financing providers in your area are searching for, you may have a better understanding of what makes sense for your organization in terms of a particular finance request at any given point in time.