More and more companies are choosing to lease some or all of their equipment to reduce their initial setup costs, expand faster, remain more flexible, and gain access to tools faster. But a lease isn’t free, and you’ll have to pay interest each month. The typical annual interest rate offered by equipment leasing companies might be between 7 and 13%, but it depends on various factors.
The best way to get started is to speak to a leasing expert and ask them about the kinds of loans you can get. If your company is in good shape and has been in operation for several years, it’s likely that you will get a great deal. However, even newer businesses can benefit from leasing, especially if they need a lot of expensive equipment and don’t want to spend too much time crowdfunding or applying for loans.
What Is a Typical Interest Rate on Equipment Leasing?
Interest rates for equipment leasing vary greatly, and it all depends on your individual situation and the kind of leasing company you select. For loans under $100,000, you can expect a rate of 7-9% if you have excellent credit and go with a reputable lender. However, smaller and less competitive offers might be between 9-20%. You can expect an interest rate of over 10% if you have bad credit or you’re a very new company.
Larger loans are usually cheaper, and you can expect a rate of 6-8%. However, these are only issued to companies that have already proven that they are profitable and reputable. If you’re setting up a startup, you should begin with a smaller lease and always pay on time. That way, you can show the lender that you are dependable, and you will soon gain access to better interest rates.
Factors Affecting Your Rate
It’s hard to estimate your interest rate without speaking to you in person because so many factors affect the price of your lease. For example, there are various kinds of leases, and some are more expensive than others. What’s more, the duration of your contract makes a difference, since some lenders prefer longer-term leases over shorter ones.
Your leasing company will also need to consider your individual situation and the health of your firm, and they will take into account what kind of equipment you are borrowing. If the tools are prone to breaking or they are very specialized, you might have to pay more than if you’re borrowing standard equipment like office furniture and general electronics.
The Length of the Lease
Here at Noreast Capital, we typically offer leases of between 12 and 60 months, with the most popular term being 36 months. We often offer better rates on long-term leases, especially if the piece of equipment we are lending is likely to depreciate or become outdated over time.
The Type of Equipment Borrowed
Not all pieces of equipment are the same, and you will need to consider what you are borrowing. Office equipment leasing can be easier. For example, some standard items like furniture are easy to lend and can be purchased by leasing companies in great quantities. What’s more, such items don’t generally require expensive maintenance and repairs, so they don’t cost the company very much.
On the other hand, some specialized pieces of equipment might only be purchased by very specific types of companies, so it’s harder for equipment leasing companies to lend them to someone else once they’ve been returned. What’s more, lessors often take over the maintenance costs, so this has to be factored into the equation. If you’re borrowing something unique to your industry, you should speak to your account manager about the interest rate.
The Type of Lease
There are many types of leases, and not all of them will be equally expensive. Businesses that know they want to purchase the equipment once their lease ends can select a capital lease, which allows them to buy the tools for $1. This is a standard contract, so it isn’t expensive to set up. Because you’re paying the same amount each month, the leasing company’s risk isn’t very high, and you won’t have to pay a very high interest rate.
On the other hand, there are some specialized contracts that might require you to pay more. For example, new companies can delay payments for several months as they start to build up their customer base. Similarly, seasonal businesses can pay more during the busy months and less during the quiet months. In some cases, these leases will be more expensive because the lender is taking on more risk.
Your Company’s Age
Most leasing companies prefer to work with businesses that have been in operation for at least two years. That way, there are financial statements and bank references available, and the profitability of the firm can be evaluated more easily. A company that has been running for many years is more likely to get a low interest rate because there is very little risk associated with lending to them.
On the other hand, a startup is much riskier because most new businesses fail within the first five years. If the company goes bankrupt, the lessor might not receive their money. For this reason, newer businesses have to pay a higher interest rate, and they might also have to provide additional documentation and a personal guarantee from the CEO.
Your Company’s Financial Situation and Reputation
As mentioned, your financial documentation will be reviewed before we can offer you a lease. That way, we can estimate whether your company is profitable and how much money you can comfortably pay back each month. If you are in great financial shape and you’ve never had any problems with other lenders, it’s likely that we can offer you an excellent interest rate and a large amount of credit.
You’ll have to pay more if you’ve failed to pay other lenders or if there is no evidence that your company is profitable. In such a case, we might start with a small and relatively expensive lease. Over time, you can prove to us that you are a reliable borrower, and we will decrease your interest rate and increase the amount you can borrow.
Why Choose Equipment Leasing Companies?
Although you can get excellent interest rates, equipment leasing is still more expensive than buying items outright. So, why do so many companies choose this method, and is it worth it? The answer is that leasing can reduce your initial expenses and allow you to invest your money into other aspects of your company.
If you’re a new company, you’ll be able to access the tools you need right away, without having to wait for several months or years. What’s more, you will benefit from increased flexibility because you can give back equipment you no longer need.
The primary benefit of an equipment lease is that it allows companies to keep their capital. If you borrow some of the items you need, you’ll have money left over to focus on other aspects of your business, such as renting an additional office or shop space, hiring more employees, or developing another product or service that can further increase your company’s income.
Leasing also allows you to plan your expenses more easily. Instead of having to spend all your money upfront, you can spread out the payments and lock in a fixed monthly price for your equipment. That way, your finance team will be able to give you a more accurate picture of your company’s financial health, since there won’t be any unexpected expenses.
At the moment, market conditions are changing rapidly. A piece of equipment that was essential two years ago might not be needed anymore today, and customers who loved one product might switch to another one within a few months. To make sure you’re not left behind, you need to be as flexible as possible. Leasing allows you to pivot faster, since you can simply return or exchange equipment you no longer need once your term is up.
Quick Access to Equipment
New companies often struggle to access the equipment they require. They might have to spend a lot of time crowdfunding or pitching their idea to investors. By applying for a lease, you can reduce your initial expenses and gain access to equipment even if you don’t have a solid customer base yet. This allows you to start or expand your company faster which is an advantages of leasing.
Equipment leasing companies offer great interest rates to businesses of all sizes and industries. While 7-13% per year is standard, your rate will depend on the kind of lease you’re getting, the equipment you need, your company’s age, and your current financial situation. Call us now at Noreast Capital to find out more about getting a lease from us. We will pair you up with an account manager, who can process your application and help you find what you need.