What Is a GoodFinance Rate?
The finance rate typically refers to the interest rate or APR (covered below) , but without a clear picture of the entire loan terms, businesses can get the wrong idea about the total cost of the loan. When applying for a business equipment loan, companies should make sure they understand allofthe associated finance charges.
Equipment finance companies provide a valued service for which many businesses are grateful. But appreciation for the chance at funding doesn’t mean companies should overlook the fine print.
Consider some of the costs and terms besides APR/interest rates.
Origination or AdministrativeFees
An origination or administrative fee may be charged as a single fee at the onset of the loan and added to the total due during the term of the loan. These fees may be calculated as a flat fee, on a sliding scale or as a percentage of the total borrowed. While companies should be aware that specifics will vary by loan offer and lender, here are some examples of origination or admin fees:
- Flat fee: $275 regardless of the amount borrowed or any other factors
- Sliding scale: $100 plus $10 additional for every $10,000 borrowed (a loan of $100,000 would equate to a fee of $200)
- Percentage: 2% (a loan of $100,000 would equate to a fee of $2,000)
A down payment may be required for businesses that don’t qualify for 100% financing. Down payments can be large. With a $1 million loan, for example, the down payment could be $100,000 or more. Luckily, down payments aren’t additional fees tacked on to the total cost of the loan, so if a business pays $100,000 down on a $1 million loan, it reduces the balance of the loan by that much. When it comes to determining a good finance rate for equipment, businesses need to understand their own credit ratings or the credit score of the principal signing for the loan. In general, the better the credit rating, the better the finance rate. A credit score of 630 or higher is typically required to obtain this type of financing. Some companies, such as Balboa Capital, work with credit scores as low as 600.
What Does Interest Mean in Business Equipment Financing?
In the scope of business equipment financing, interest typically refers to the interest rate or APR charged on the loan. In order forthe lender to make money, they charge interest on the total amount financed, meaning that the borrower pays back more than they borrowed. The difference between the total amount paid back and the total amount borrowed is the lender’s profit.
How much the lender makes offa business equipment loan depends on two factors: the interest rate and how much of the loan the borrower pays back. Companies or principal signers with lower credit ratings, poor cash flow or other financial struggles will likely pay a higher interest rate. This is because lenders are willing to offer loans to companies without perfect credit histories or financial situations, but they see those loans as somewhat of a risk. The higher interest rate is a way to hedge their bets on such a loan.
What Does APR Financing Mean?
Ultimately, annual percentage rate (APR) financing means mostly the same thing as interest financing. This rate considers the total cost of the loan, including the interest rate and any fees added to the loan. If the interest rate for an equipment financing loan is 6% but there are fees totaling $1,000, the APR will be slightly higher than 6%.
For businesses trying to decipher equipment loan interest rates to figure out the best deal from various lenders, APR is often the best factor to consider because it takes all the costs into account.
Business Equipment Financing Terms
Companies can’t base decisions about equipment loans solely on the interest rate or APR. How long the business has to pay back the money borrowed, including all the interest and fees, is a major factor in determining whether a loan is affordable.
Small business equipment can typically be financed for time periods such as six months, six years or for the life of the equipment. It is best for the terms of the business equipment loan to coincide with or be shorter than the life of the equipment. On one hand, businesses don’t want to be paying for equipment that’s no longer useful. The lender, on the other hand, doesn’t want to extend financing past the life of a machine because if the borrower defaults on the loan, there’s nothing to sell to recoup any of the loss.
The Total Cost of Finance for Equipment
The bottom line is important for any business, so companies considering an equipment loan should calculate the total funding cost before making a decision.
Take this example using some of the best finance rates available to businesses seeking equipment funds:
- A business needs to purchase $200,000 in factory floor equipment.
- The company qualifies for 100% financing with no originating fees and an APR of 8%.
- The estimated life of the equipment is 10 years, and the lender agrees to a 10-year loan term.
- Given these numbers, the company would pay $2,426.55 per month for 120 months.
- The total outlay associated with the loan is $291,186.23.
- The total cost of the loan is $91,186.23.
Consider another example with heavy equipment financing rates and a business or principal signer without an excellent credit history:
- The business needs to purchase equipment for the same $200,000.
- It qualifies for 100% financing but at an APR of 23%.
- The terms are the same as the above example, with the business making payments for 10 years.
- Given these numbers, the company would pay $4,270.96 per month for 120 months.
- The total outlay associated with the loan is $512,514.72.
- The total cost of the loan is $312,514.72.
Many small businesses don’t need to finance such large amounts, so consider similar scenarios when a company wants to borrow $10,000 for office furniture or an upgrade to a commercial kitchen.
At 8% APR and 100% financing over a term of three years, the company would pay:
- $313.36 per month
- $11,281.09 total
- $1,281.09 in interest
At 23% APR and 100% financing over a term of three years, the company would pay:
- $387.10 per month
- $13,935.50 total
- $3,935.50 in interest
The comparisons above make it easy to see the value in seeking the lowest possible interest rate for a business equipment loan. Companies may be able to lower the total cost of a loan by paying it off faster than the terms, but that depends on the fine print of the financing and whether there are penalties for paying down principal faster.