Equipment financing rates can vary considerably from one lender or leasing company to another, among different types of assets and geographies as well.
This is largely due to the wide spectrum of financing models that are in the market, and the manner in which each lender or lessor targets the market and prices their funding according to risk.
So while there can be some funder specific criteria that impacts the effective lending rates, there are some basic guidelines that you can follow when trying to assess the type of financing rate you should be paying.
First of all, equipment financing rates will have some dependence on the size of the deal. For instance, on amounts under $200,000, the rate is typically going to be higher than for larger borrowing or leasing amounts.
Second, lower rates tend to be offset by a slower process for application and funding, and a lower financing amount or loan to value. As an example, if you were to get a small business equipment loan through a bank, the lowest potential cost of financing would be prime + 3%. But in order to qualify for that rate, you are going to have to survive a very thorough application process which will require you to have strong credit, and strong personal net worth to guarantee the loan…and the loan to value will not likely be more than 75%.
If you want a higher loan to value then its likely that the rate will also be slightly higher to offset the relative risk of the financing source.
For instance, most leasing companies will provide “A” credit clients with leverage at or near 100% of the asset acquisition cost. But the effective rate on borrowing also tends to be slightly higher than what they may be able to secure at a bank or institutional lender where they still may qualify.
The slightly higher rate from a small ticket leasing company not only can provide higher leverage, but also faster turnaround time as compared to bank financing option.
So as a business owner, there are trade offs to consider in terms of cost, leverage, and timing.
Businesses that have been established for under three years, or have some degree of credit or financial distress will be faced with a higher cost of borrowing as well due to the higher risk of potential loss to any financing company that approves funding.
There can also be equipment leasing rates at or lower than bank rates, but these are typically reserved for companies with very strong credit profiles, or for situations where the equipment manufacturer or dealer have provided the finance company with some type of risk reduction which allows the effective rate offered to the customer to be lower.
Type of equipment can also impact the effective lending rate. The more a piece of equipment is considered to be a commodity with a large and predictable resale market in terms of resale value and time to complete a sale, the less risk that will be associated with that particular asset.
From a geographic and industry point of view, finance companies will also have preferences with respect to their lending and funding criteria, providing better rates for locations and industries that best fit those criteria.
The main main takeaway here is that it is not always obvious as to what the best financing option is for a given situation until all the relevant factors are considered.
By thinking in terms of what the sources of equipment financing in your area are looking for will provide a better guideline as to what makes sense for your business for an particular financing request, at any given point in time.