5 factors that impact your equipment finance interest rate

Whether you’re updating your office with a swanky new fit-out, or getting a truck to transport goods to your distributors, equipment finance is commonly used to fund these purchases. So when looking at options, a key consideration is how to keep the costs at a minimum.

The interest rate of an equipment finance loan is calculated based on a few factors, such as: the amount of money you’re borrowing, the health of your business, and the economy. The good news is, there are ways you can lower your interest rate and make equipment finance even more affordable. Let us explain.

What is equipment finance?

Before we dive into the factors that influence equipment loan interest rates, let's briefly revisit what equipment finance is. In short, it is a way to acquire equipment for your business while spreading the cost over time. You own the asset from day one, but it's used as security for the loan.

There are three main types of equipment loans: chattel mortgage, hire-purchase agreement, and lease agreement. Choosing the right one for you comes down to a few key things—like whether you have assets to secure the loan, how long you’ll need the equipment, and how much flexibility you want.

5 factors that influence equipment finance interest rates

1. The economy

The national interest rates are set by the RBA (the Reserve Bank of Australia) and are adjusted to steer the overall economy and vary according to specific headwinds, such as high inflation or unemployment [1].

While this is out of your control, it’s worth noting that interest rates naturally fluctuate with the economy, which then impacts how much repayments you will pay.

2. Your credit history

The higher your credit score, the lower your interest rates. A positive credit history shows lenders that you’re capable of managing credit and making repayments on time.

If your credit history is recently established or has little to no activity listed, lenders will also be cautious, and may charge higher interest rates as a result of the uncertainty.

A great way to build your credit history is by demonstrating good financial habits, including paying bills on time, only applying for credit you absolutely need, and spacing out any credit applications over a longer time period. It’s a wise move to check up on your credit score before lodging any new finance applications.

At Valiant, we run a soft credit enquiry to check your eligibility for finance before starting your application, which does not leave a mark or enquiry on your credit file. This helps keep your credit record in good health.

3. How long you’ve been in business

Typically, the older your business is, the lower your interest rates will be. Older businesses are usually more established and therefore considered more trustworthy.

If you’re a new business, it is possible to secure finance, but be prepared to pay more in interest. You may also need to secure your business loan with a collateral, or a personal guarantee. The good news is, offering some form of security can help to lower interest rates.

4. Your company’s financials

When assessing your application for finance, lenders will want to see a healthy business and in some cases, consistent cash flow. They will look at the following documents to determine the health of your business:

• Your balance sheets
• Cash flow statements
• Bank statements
• Profit and loss statements

They may also ask you about your business plan and growth goals. If you’re looking to take out finance or want the option to do so in the future, it’s important to stay on top of your business’ health to prove you’re able to successfully run a profitable business. In turn, this will contribute to lower interest rates.

5. Age of equipment

Interest rates for new equipment are typically lower than for used equipment, for several reasons. This is mainly because older machinery has more wear and tear and is more likely to need repairs or even stop working, which makes it a bigger risk for lenders.

Steps you can take for affordable equipment finance

Improve your credit score

Establishing a trustworthy pattern of applying for credit, whether for your business or personal use, can increase your credit score and build a positive credit history, provided you’re making repayments on time and in full.

Compare lenders and finance options

Compare lenders and products with Valiant. Valiant works with a diverse panel of over 90 Australian lenders, and leverages their relationships to ensure you’re getting a great rate and outcome. We’ll also handle paperwork and assist you throughout the application process—from enquiry through to settlement.

Adjust your loan structure

You can lower interest rates by securing your loan with the equipment you’re borrowing. This means that if you default on your loan, your lender will take the equipment you borrowed and use it to recoup any losses incurred. You’ll benefit from lower interest rates and you won’t need to put any of your own assets down as upfront security.

Be confident you’re getting a great rate on equipment finance—don’t sign papers blindly. Let Valiant point you in the right direction, with 100+ years combined experience in the lending industry. Get free finance quotes today, and finally grow your business the way you want.

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References

1. https://www.rba.gov.au/statistics/cash-rate/