How much will an equipment loan cost?

Westend61/Getty Images: Illustration by Issiah Davis/Bankrate

Equipment loans come with a variety of costs that influence the total cost of borrowing — including the down payment, appraisal fees and loan interest. The main cost is the equipment’s purchase price since that will determine the loan amount.

Here’s a look at each of the influencing factors and how they affect the equipment loan costs in detail.

Cost of equipment

The cost of buying equipment varies considerably depending on the industry you’re in and the equipment you’re buying. Equipment costs could range from $500 for small items like photography equipment to $500,000 for construction or manufacturing equipment.

Lease vs. own

Equipment leasing lets a business rent equipment from the leasing company for a set term, like three years. The business makes monthly payments and adheres to any conditions in the lease. Yet, unlike a business loan, the leasing company retains ownership of the equipment unless it offers a buyout feature at the end of the lease.

If a business buys or finances equipment, it will require more money upfront than a lease. But the business builds equity and can sell the equipment when it’s time to upgrade.

Creditworthiness

Most lenders have relaxed credit requirements for commercial equipment loans. Many of the best equipment loans accept credit scores as low as 600. Some may even be willing to work with business owners with even lower credit scores.

Since equipment loans are secured by the equipment as collateral, lenders also offer low rates starting around 5 percent to 6 percent.

Can you finance equipment with bad credit?

Yes, equipment loans are some of the easiest to qualify for with bad credit. Online lenders often consider factors outside of credit scores, such as the type of loan, the business’s industry and financial statements like accounts receivable, accounts payable and profit and loss.

Businesses with bad credit will have to settle for higher interest rates, which could go as high as 25 percent to 35 percent or higher.

Loan term

Most equipment loans offer repayment terms from 12 to 60 months, though some lenders go up to 84 months. The repayment terms are designed to mirror the lifespan of the equipment.

Choosing a short repayment term works in your favor because there’s less time for the equipment to break down and need replacement. Short terms also mean paying less in interest.

For example, if you finance $50,000 of equipment for five years with 9 percent interest, you’ll pay $12,275.07 in interest. The same equipment financed for three years will cost you $7,239.52 in interest. The shorter term will have higher monthly payments but would save you over $5,000.

Fees

Equipment loans are a straightforward type of business loan that don’t require many fees outside common business loan fees. Some equipment loan fees you might see on your loan agreement:

• Origination fee. Initial cost charged to review your loan application. Often between 2 to 5 percent of the loan amount.
• Appraisal fee. Fee to determine the true value of your equipment. Could cost a few hundred dollars to appraise one or two pieces of equipment or several thousand dollars to review multiple types of equipment.
• Documentation fee. A generic administrative fee used to cover the costs of processing a loan. Usually a flat fee, such as $150. 

Down payment

Many lenders require a down payment between 10 percent to 20 percent of the loan amount. If you financed $50,000 of equipment with a 20 percent down payment, you’d need to put $10,000 down for the loan.

The down payment can add significant upfront costs to an equipment loan. But it might lower your interest rate, saving you in the long run.

How to estimate the total cost of your equipment loans

When getting an equipment loan, you’ll want to know the full cost of the loan upfront so that you can work the monthly payment into your business budget. To do so, you’ll need to:

• Estimate equipment costs. Start by getting estimates from the equipment vendors where you will buy your equipment. These estimates will help you know how much funding you’ll be requesting.
• Research lender interest rates or factor rates. The next major factor that influences your equipment loan cost is the interest. Typical interest rates are a percentage and are calculated on the current balance of the loan. On the other hand, factor rates are a decimal like 1.10 or 1.50 that gets multiplied by the entire loan up front. Factor rates often result in higher loan costs because the fee typically converts to a high interest rate.
• Calculate costs over the repayment term. When using interest rates, the repayment term is the amount of time you’ll pay interest on the loan, a crucial factor in determining costs. You would need to calculate the interest you’ll pay over the entire length of the term.
• Add additional loan fees. Once you’ve figured out the loan amount and interest, you’ll want to add other loan fees, which can vary by the lender. For example, some lenders charge an origination fee as a percentage of the loan amount. You’ll also want to consider the down payment for the loan. Add these fees to the loan amount and total interest to get your final estimate.

Bottom line

The total equipment loan cost depends heavily on the equipment you’re buying as well as your creditworthiness as a business, among other factors. The price of the equipment is directly related to the amount you’ll borrow for the loan, and the interest gets calculated by that principal loan amount.

Then, the lender you choose will set an interest rate based on your cash flow and credit history. The higher the interest rate, the more you’ll pay in interest over the life of the loan. In general, equipment loans tend to offer lower interest rates than other loans since they’re secured by the equipment.