How are Equipment Business Loans Calculated?
Several factors go into calculating equipment or business loans. Let’s break down the individual parts of the loan to better understand how equipment lenders evaluate your request.
Compare your options with our equipment loan calculator.
Equipment Loan Amount
The first and most obvious is, how much does the equipment cost? The purchase price reflects the total amount the vendor is charging to purchase the desired equipment.
Equipment financing can be used for a wide range of items, from bulldozers to the kitchen sink. The price range is just as wide. Such loans start at around $10k and can go as high as $5 million per piece of equipment. Knowing how much you need to borrow is the first step to securing financing..
Interest Rate
Once you know the purchase price for the equipment, you need to know the interest rate. Interest rates can vary depending on your credit score and the strength of your business. Typically, the higher your credit score, the lower the rate; a low credit score usually means higher rates.
Current rates for equipment loans vary significantly, with average rates ranging from 4% to 45%. A lower interest rate means a lower payment and lower total interest. One advantage of an equipment loan over other small business loans is that you can use the equipment as collateral to help bring your rate down. The interest rate you receive often depends on your credit history and the financial institution issuing the loan.
Loan Term
A loan term is how long you have to repay the loan and your monthly payment during that period. Most financing terms range from 12 to 72 months. Lenders will consider your business needs and what you can afford in monthly payments when determining the length of the loan. The longer the loan term, the lower your monthly payments; however, the total cost of financing may be higher with a longer term than a shorter term.
At its simplest, the payment would be the principal (amount borrowed) times the interest rate divided by the number of months in the loan term. However, with APRs, compounding interest complicates the formula, making it more challenging to arrive at a fully amortized payment. This is where the equipment loan calculator is super helpful – it automatically factors in the APR for a more accurate estimate of your monthly payments.
What is the Total Cost of an Equipment Loan?
Current rates for equipment loans vary significantly, with average rates ranging from 4% to 45%. The annual percentage rate (APR) includes both the interest rate charged on the loan and any fees added by the lender. The loan term typically ranges between three and ten years, depending on the specific equipment and other factors. Terms for equipment financing solutions from our network of lenders start at 12 months.
Once you know the loan amount, interest rate, and loan term, you can calculate the total cost of the business loan. For example, a $500,000 loan with 8% interest over five years would total around $609,791. There are other considerations, though.
Some business loans come with an origination fee or other fees. Also, you need to know whether you can make a down payment. With equipment loans, it’s possible to finance 100% of the cost, but a down payment could help lower your interest rate, monthly payment, and total interest paid over the life of the loan. The payment frequency, amortization type, and equipment price also influence the cost.
How Accurate is the Loan Calculator?
Our equipment loan calculator gives you an estimated financing cost. We work with multiple lenders who finance equipment loans, so the estimate is based on real-world data. However, the actual cost of your loan will depend on specifics such as your credit score, lender fees, and additional terms. Still, the calculator helps you compare financing options and determine what you can afford.
How Do I Use the Calculator?
Move the toggle to change the loan amount and watch it calculate your payment for different loan terms.
Frequently Asked Questions
We work with a lot of companies on securing equipment loans. Here are some of the frequent questions we hear.
How hard is it to get approved for an equipment loan?
Fortunately, equipment loans have one of the highest approval rates among all funding types in the market. Equipment loans are typically secured by the equipment being financed, making them relatively low-risk for lenders.
Equipment loans are available with almost every type of lender. Banks and credit unions typically offer the most affordable options for financing equipment. Online lenders may be able to fund an equipment purchase in as little as 24 hours. SBA equipment loans offer long terms, typically 10 years or more, depending on the equipment’s useful life.
Online lenders and local banks, such as Wells Fargo and Bank of America, are more likely to approve equipment loans. Around 80% of businesses applying for this type of loan are approved. Approved companies typically need to have the following:
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A credit score of 600 or greater.
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A minimum of one year in business.
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At least $250k in annual revenue.
What can I use an equipment loan to purchase?
Businesses can use an equipment loan to purchase new or used equipment. They are not limited to any specific industry. Some types of equipment you can acquire with a loan include:
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Computers, printers, and computer accessories.
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Copiers.
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Desks and other office furniture.
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Construction (heavy) equipment, such as tractors, bulldozers, etc.
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Vehicles.
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Dog grooming equipment.
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Salon or beauty spa equipment.
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Restaurant equipment, including industrial ovens, freezers, and refrigerators.
If you want to know if your next intended purchase is eligible for this loan, ask us today.
What industries can get equipment loans?
These types of loans are not limited to any specific industries. However, loan amounts can vary depending on your industry. We collaborate with industry-specific lenders to help borrowers secure the most favorable loan terms.
How much can I borrow?
The amount you can finance and the loan offers you get depend on several factors. The amount of the equipment, its lifetime value, whether it’s new or used, and its intended use all factor into how much you can borrow. Also, your credit score and business revenue significantly impact your borrowing limits.
Is it better to finance or lease equipment?
This depends on your business needs and the equipment’s lifespan. Generally, a loan is best suited if you plan to use the equipment for three years or more. Some businesses prefer the lower commitment of a lease, while others opt to own their equipment outright at the end of the financing period.
Leases typically come with lower upfront costs, such as no down payment. If you lease equipment, the lender retains ownership of the equipment during the lease term. Leasing can help preserve cash flow for other business needs due to its lower upfront costs. When you purchase equipment, you own it outright after the loan is repaid. Purchasing equipment can result in higher total costs than leasing, due to interest and fees.
How long can you finance equipment?
Most loans have terms ranging from one to six years. The exact length of the loan will depend on how much you’re funding and how much you can afford to pay based on your revenue. If the new purchase helps boost your revenue, factor the projected growth into your budget. Just be careful not to overestimate the increase, or you could end up with a high payment you can’t afford. We work with businesses every day to help them determine their options.
How much do I need for a down payment?
Some small businesses can get a loan with little to no down payment. Certain loans, such as those for construction equipment, may require a down payment. If you’re looking to purchase but don’t know if you can afford a down payment, we can help you find the right loan for your needs.
Are equipment loans tax-deductible?
In most cases, the interest paid on equipment loans is tax-deductible, but it is not guaranteed. Before committing to a loan and getting funded, speak with a tax professional to ensure it is eligible for a tax deduction. The cost of the equipment can also be deductible through the Section 179 Tax Deduction.
What are the other fees for an equipment loan?
Additional fees may vary depending on the type of loan, the lender, and other factors. Some loans require an origination fee, which is paid when the loan is funded. Some loans will incur prepayment fees, while others may not. Be sure to review any legal disclaimers as well. Less reputable lenders might try to sneak in hidden fees.
One of the most important things to remember is to make your monthly payments on time. Late payment fees increase your costs and significantly impact your interest rates. When you take out a loan like this, consider setting up automatic payments for the minimum monthly amount to ensure you never miss a payment.
Bottom Line
Equipment loans can help you grow your business and achieve your goals. Our calculator is designed to help you understand what financing will cost and what you can afford.
But you don’t need to go at it alone. Our industry experts are always available to help you navigate financing for your next purchase.
