How Much Will an Equipment Loan Cost?

Westend61/Getty Images: Illustration by Issiah Davis/Bankrate

Getting the right equipment can be a game-changer for your business, but it often comes with a hefty price tag. That’s why financing is a popular option for many small businesses. According to the Equipment Financing Industry Horizon Report 2024, 82 percent of businesses used some form of financing to pay for equipment or software in 2023.

Before you jump into an equipment loan, it’s important to understand what it could cost you. From interest rates to fees, knowing the numbers can help you make the smartest financial move for your bottom line.

Factors that influence the costs

Several factors go into the cost of the loan.

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 or more for construction or manufacturing equipment.

Cost will also depend on if you lease or own the equipment. 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. 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.

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:

• 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.
• Origination fee. Initial cost charged to review your loan application. Often between 2 to 5 percent of the loan amount.
• Prepayment fee. Some lenders charge a prepayment penalty if you pay the loan off before the final payment is due. Penalties can vary by loan type and term and typically go down each subsequent loan year. For example, if you pay off at least 25 percent of your SBA 7(a) loan within the first year, you’ll pay a 5 percent prepayment fee. The fee drops to 1 percent after three years.

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:

1. 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.
2. 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.
3. 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.
4. 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.

How to reduce the cost of an equipment loan

Equipment loans can be expensive if you’re financing a large purchase. These tips can help reduce the total cost of an equipment loan:

• Improve your credit score: A higher credit score can help you qualify for lower interest rates. Before applying for equipment financing, take the time to pay down existing debt and check for errors in your credit report.
• Shop around for lenders: Rates and terms can vary significantly between banks, credit unions and online lenders. Get multiple quotes to compare lender interest rates, fees and repayment terms.
• Consider a larger down payment: Putting more money down upfront reduces the amount you need to borrow, which lowers the total interest paid over the life of the loan.
• Choose a shorter loan term: While longer terms may offer lower monthly payments, shorter terms typically come with lower interest rates, which reduce your overall costs.
• Lease instead of buying: Leasing might be more cost-effective depending on your needs, especially if the equipment will become outdated quickly or need expensive repairs or upgrades.
• Check for government-backed loans: Programs like SBA 7(a) loans may offer lower rates and longer repayment terms, especially for newer businesses or those with limited credit history.

Bottom line

Equipment financing costs can vary widely depending on several key factors, including the type and price of the equipment, your business’ credit profile and the lender you choose. Since the loan amount is directly tied to the cost of the equipment, more expensive items will lead to higher borrowing costs.

Your lender will also set an interest rate based on your creditworthiness and cash flow, meaning the stronger your financials, the lower your rate could be. Equipment loans typically come with lower interest rates compared to unsecured financing options because the equipment you’re buying acts as collateral to secure the loan and hopefully, a better interest rate.