How Your Industry Affects Equipment Loan Interest Rates
April 12, 2019
April 12, 2019
Your industry classification is often used by lenders to determine your interest rate on equipment loans. Banks and other lenders use statistical formulas to determine which industries have the highest or lowest default rates and adjust their interest rate policy on equipment loans accordingly.
Interest rates on commercial loans will almost always be higher than comparable rates on residential mortgages. As a general rule, commercial interest rates will be approximately 3% to 5% higher. The reason for higher interest rates on commercial loans is due to a higher default rate for businesses versus personal mortgages.
It can seem unfair, but lenders will often let your businessâ€™s industry impact the interest rate of the equipment loan you receive. Every small business owner feels that his or her company is different from all the others in the industry. And it very well may be.
But to lenders considering an equipment loan, your area of industry can go a long way in informing the interest rate or pricing you receive. All business loans are, at their core, a bet on your company. And lenders use interest rates and fees as a way to protect themselves from any chance of default.
Of course, there isnâ€™t a blanket interest rate for any particular industry. Just because youâ€™re applying for an equipment loan for a restaurant doesnâ€™t mean that youâ€™re getting the same rate as every other restaurant going for the same piece of equipment.
Make sure that your personal credit is in the best shape it could possibly be in – aggressively pay down any personal loans and rigorously review your credit reports to catch any of the common errors that do happen all too often.
Create a business plan thatâ€™s aggressive but realistic and shows lenders that you have specific measurable goals and well-thought-out steps and benchmarks you can hit to achieve those goals.
Presenting yourself as a financially healthy person with a clear view of your businessâ€™s future will go a long way in keeping the interest low on your equipment loan.
Businesses in a great many industries can find themselves in need of an equipment loan. Here are some sample industries as well as some scenarios in which small businesses in those industries could apply for an equipment loan. As you can see, the industry that a business is in can significantly affect the interest rate that a company pays on its equipment financing.
Risk for lenders in considering equipment loans for construction companies comes from volatility of the housing market. And the housing market can vary depending on a massive amount of factors, including your location. As a construction company owner, youâ€™re going to be familiar with the long- and short-term housing trends in your area, so youâ€™ll have a good idea of what the lender is going to look at.
As the economy grows, so does consumer confidence. And that often means a more robust real estate market. During times of economic growth, a lender is more likely to see the possibility that your business will be able to repay the loan because the economy at large allows for more construction.
Construction companies need lots of large and costly equipment. Construction vehicles, cranes, machines for pouring concrete or other foundation materials, and vehicles to transport raw materials could all require an equipment loan. So could items and tools used more directly on the worksite and of course upgrades and repairs to any of the above.
One thing youâ€™ll notice with all the equipment listed above is that theyâ€™re not prone to being made obsolete. A truck that can haul tons of lumber probably wonâ€™t need to be replaced by a costly new truck every couple of years like a computer will. So rest assured that when you take a loan on a long-lasting item, you probably wonâ€™t be taking out another loan to replace it any time soon.
Similar to construction, agricultural businesses frequently require large and expensive pieces of equipment. Tractors, irrigation systems, crop storage, and harvesting mechanisms all require equipment that could be well-suited to an equipment loan.
In fact, so much equipment goes into agriculture that most small agricultural business owners tend to have a long history of borrowing and managing farm debt. And outside of your personal credit, the size of your operation will have a huge impact on your agricultural equipment loan interest rate.
The larger your operation is, the more likely you are to reap the benefits of insurance rates, federal farm subsidies, and more. And the more profitable youâ€™re likely to be. So if you show lenders that a new piece of equipment will make you more efficient on a large scale, youâ€™re likely to see that theyâ€™ll work with you on the cost of acquiring financing.
The restaurant business can be a difficult one for owners and lenders alike. The restaurant failure rate is notoriously high – and for good reason. Many restaurants need to be located in prime real estate to drive the sort of volume it takes to stay afloat, and those spaces arenâ€™t cheap. Many restaurants are also seasonal, and the menu can vary greatly in quality depending on the talent youâ€™ve hired in a field that has notoriously high turnover.
And on top of all that, many types of restaurants all but require an expensive piece of equipment. Pizzerias need ovens; ice cream shops need freezers; almost all restaurants need an expensive range or stove.
So it can be expensive to acquire an equipment loan for a restaurant. Before you apply, you should have crossed the tâ€™s and dotted the iâ€™s on every aspect of your restaurantâ€™s business plan, projections, and outlook. Youâ€™ll need a plan to deal with payments if sales dip and a plan to get yourself ahead if they grow.
There are dozens of other kinds of businesses that can benefit from financing their vital equipment. From realtors who need office equipment to dentists and doctors that have very specialized devices they absolutely must have to stay in business, the real answer is that thereâ€™s no one-size-fits-all approach to equipment loan interest rates.
No matter what industry youâ€™re operating in, the biggest thing you can do to improve your cost of financing for equipment is to have a very clear plan for how youâ€™re going to use it to grow your business and increase your income. If you can show your lenders a clear plan and prove that youâ€™re committed to achieving it, you can be pretty confident youâ€™ll get a good overall deal.
These are just a few prime examples of industries in which equipment loans are common, even expected. But these loans are helpful for businesses in almost any field. Offices need computers, retail shops need point of sale systems, and hotels need laundry machines.
Regardless of the particulars of your company and its industry, there are some universal truths to be found. There are always questions to consider before you acquire an equipment loan. But knowing how your industry affects your companyâ€™s risk factors and seeing your business from the lenderâ€™s perspective can help you find the best possible interest rate for your equipment loan.