When business owners are looking to acquire equipment, one of the biggest questions they have is what are the interest rates for equipment financing? We answer that question here.
There’s no doubt that there are many advantages to leasing equipment instead of cash purchasing. The advantages are numerous: preservation of capital, tax advantages and most importantly, preferable interest rates.
As one of the most important and relevant factors to the overall leasing process, knowing what kind of rate to expect when financing that equipment is something many business owners want to know before they make the decision to lease or outright purchase the equipment they need for their business.
Interest Rates for Equipment Financing: The Two Primary Means
Capital Equipment Loans
When you finance equipment there are two ways in which to do this – either through a capital equipment loan or through a lease. Capital equipment loans are typically loans from banks and or finance companies led to a company for the purpose of acquiring equipment.
The company then owns that equipment and puts them on their books. Also, this includes an obligation to pay back to the bank or finance company, which is also itemized in their books.
The loan is secured by the equipment, so if the company defaults, the equipment is taken away by the lender. Like with a mortgage, the equipment in this case, is the piece of property which collateralizes the loan.
These kinds of capital equipment loans carry an interest rate anywhere between 6% and 12%, with the rate largely dependent on the credit worthiness of the customer.
With a lease, the manufacturer or the dealer of the equipment may provide the financing.
Let’s say you have a busy medical practice and need a new MRI machine. The MRI manufacturer, let’s say it’s GE, can then lease those MRI machines to you for a fixed monthly amount on a fixed term. In most cases, this term is 3 to 4 years.
At the end of the lease term, you’ll have the opportunity to buy that MRI machine for a small amount of money – in many cases one dollar – or you can return them to the lessor.
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Some leases will end up on your books in the end and others will not – you have this option when you negotiate the terms of the lease agreement.
Leasing Versus Buying – Which Is Better?
In either method, you the business owner acquire the equipment you need to operate and grow your business.
Leasing equipment can be an excellent option for many business owners who might have limited capital resources or have the need for equipment which is subject to significant wear and tear. Businesses that need equipment which have a long usable life, may consider purchasing.
There are a number of significant advantages to equipment leasing:
Technology advancements: with technology rapidly improving in all areas of equipment leasing and due to the fact that you can upgrade the equipment to a more advanced model at the end of the lease term, most businesses today are choosing leasing instead of outright purchasing equipment.
Lower interest rates: If you need to take out a loan on the purchase of equipment, you will typically pay a far higher interest rate than you would if you financed that same equipment through a lease.
No down payment: Most equipment leases don’t require a down payment, which allows you to preserve your capital for other things. Factoring in that a business can acquire the assets it needs to run and grow its business with very little initial cash outlay, business equipment leasing has become a favorite of most small, medium and large-sized companies. If you buy your equipment, many banks require a very large down payment, in excess of 20% of the value of the equipment. Most businesses can ill afford this type of cash outlay.
Significant tax advantages: There are many tax advantages to leasing as well. Your lease payments are a business deduction on your tax return, which allows you to lower the real cost of the lease itself.
Very flexible lease terms: Equipment leases have extremely flexible terms to allow you to tailor the lease terms based upon your cash flow, business needs and individual situation.
Upgrades available: for many businesses, obsolete equipment is a detriment to the efficiency of their business. In our medical example, an MRI machine which is outdated may give less accurate results than one which has the latest technology and upgrades. When you by your equipment you are stuck with the old equipment and need to initiate a new purchase. Leasing allows you to do this easily, whereas when you buy, you are stuck with obsolete equipment which you’ll need to either trade-in or sell on your own.
Interest Rates for Equipment Financing Will Vary
To best answer the question: what are the interest rates for equipment financing, the answer is that it all depends on your means in which you acquire the equipment.
There are clear advantages to leasing over buying. This is the reason why so many business owners choose to lease and finance their equipment instead of making a cash purchase.
Not only will your interest rates be lower, but you’ll enjoy all the benefits of leasing as outlined above.
To see how we at LeaseQ can help you get the best rates on your equipment lease, watch this video below and then see what you qualify for here.
If for some reason, you cannot see this video, click here to watch it.