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Equipment

What Determines the Interest Rates on Your Equipment Loans

For most small businesses, good credit is the best way to fuel growth. You’ll apply for credit financing when you want to acquire new equipment, increase working capital or sometimes to meet a short-term cost such as salaries in anticipation of future revenues. The good news is that banks and other lenders have developed products to finance growing businesses. If your business is in the expansion phase, you can approach contact our team for equipment loans.

Like any other business, simple accounting demands that you factor in the interest charged on the equipment loan in the cost of acquiring the equipment. For you -the business owner, high-interest rates translate to more costly the equipment, and thus takes a bigger chunk away from your bottom line.

But how do lenders come up with the interest rate to charge?

Here’s what determines the interest rate on your equipment loans.

Benchmarks

The benchmark interest rate is a term that refers to the average rate among Aussies four main lenders – NAB, Westpac, ANZ, and Commonwealth. It’s also commonly used to describe the minimum interest rate investors are willing to take on non-treasury security.

However, in the equipment loans market, benchmark rate is an important tool for the lenders. Equipment finance lenders use this as a base rate to advance loans to their most creditworthy business borrowers. For small business borrowers, lenders increase the rate by certain percentage points primarily by the perceived risk.

You can reach out to our team and have an excellent comparison of equipment loan rates.

Demand and Supply

The interest rate you pay on your equipment loan is the actual price of the money you have borrowed. The classical effects of demand and supply take shape even in the financial markets. When there is little demand, lenders may lower interest rates to spur borrowing. Contrariwise when the demand is high, banks may charge more.

But these fluctuations don’t just happen in a vacuum. The Reserve Bank of Australia has the mandate of regulating the financial sector. One way it controls against wayward interest rates is by setting a target cash rate which the banks can borrow from it. Since the financial meltdown of 2008, the target cash rate has been on a downward trend, from a high of 7.25% in August 2008 to under 2% presently.

Risk Factors

How far the lenders choose to increase percentage points above the benchmark rate for your equipment loan is dependent on three factors:

  • The creditworthiness of your business,
  • The value of the equipment loan
  • The loan purpose.

To determine your business’ creditworthiness, lenders will evaluate your business plan, credit references and ratings and financial ratios such as debt-equity ratios and how they compare with your revenues.

The value of the equipment loan is compared against your investment in the business and income. If the value of the equipment loan is much lower than your investment or annual revenue, the equipment loan will attract a lower rate.

The loan purpose also influences the interest rate to business borrowers. Equipment loans tend to attract lower rates since the lenders hold the equipment as collateral during the loan tenure.

Equipment Loans

Creditworthiness of the Entrepreneur

 

If yours is a small business, most likely it has few decision makers and a less elaborate process of making decisions. Naturally, it becomes hard to dissociate your personal attributes from the business. Banks take cognizance of this and consider your experience in the business as well as your credit history as they review your equipment loan application and rate to apply.

Click here to see how you can check your credit history and credit score

In conclusion, the above four factors are what primarily determine the interest rate on your equipment loan. The most prominent factor one being the risk. To learn more, shout out to our team and see how you can access low rate equipment loans for your business.