I’d like to talk a little bit about rates today. Because, in a way, a rate, particularly on equipment financing, is the “price tag” of the deal. Just as one compares prices between stores, one compares rates when shopping for equipment financing. But it can be misleading. Here’s why:
In theory, with most commercial equipment lending, all rates start out the same, and then are adjusted appropriately based on risk. And the amount of risk a lending institution is willing to accept will correlate into the rates they offer. The less risk a lending institution accepts, the lower the rate they can give.
This is one reason why a bank will often have the lowest rates. Because historically, a bank is unwilling to accept risk. This is why they require account minimums, blanket liens, outside collateral (houses, etc.), and similar. An equipment financing company like mine might not require any of those things, but the rate, while still competitive, might be slightly higher.
Now, in and of itself, this is fine. But what tends to annoy us equipment financing people is that borrowers often only look at the rate, and not what else is factored into the deal. To give a quick example, if you borrow $75,000 from an equipment financing company, the equipment itself (plus your good name) might be all the collateral you need. The bank will require those things too, PLUS they will probably ask that you keep 50k in an account at all times (and that’s 50k you now can’t use – so you’re essentially borrowing from yourself.) Or, the bank may require the company principle to put up real estate as collateral. Or both – we’ve seen banks pretty much tie up everything you own because you wanted to finance a new machine. Plus, the bank will look at all factors every year and ask you to “requalify” for the loan. An equipment financing company won’t.
So yes, the rate is the visible price tag, but it’s far from the only factor involved. The smart borrower looks at everything, and weighs the true costs of any equipment lease or financing deal.