Financing the purchase of capital equipment is often a great way to secure use of the equipment and utilize the resulting revenue stream to gradually retire the debt, without putting a great deal of stress on existing company resources. When considering the possibility of capital equipment financing, there are several key factors to keep in mind, including the interest rate assessed on the balance of the loan, any other fees and charges that may apply, and the amount of the monthly installment payments associated with the financing.
As with any type of loan arrangement, the rate of interest that is applied to the capital equipment financing is extremely important. The idea is to secure the lowest possible rate and keep the total cost of the financing at the most competitive level. Depending on the current credit rating of the debtor, it may be possible to command some of the best rates on the market. Lenders will look closely at the degree of risk that is assumed by approving the financing, and will extend interest rates and terms accordingly. For this reason, it’s a good idea for businesses to make sure they are current on all outstanding obligations and that it is possible to demonstrate to the potential lender that taking on the loan will not present a significant degree or risk.
Along with the interest rate, going for the best possible capital equipment financing also involves considering the cost of various fees and charges associated with the loan arrangements. Look closely at any type of set-up fees or annual account handling fees that may be found in the loan contract and factor them into the overall amount that is paid over the life of the loan. In some cases, the amount of these additional fees and charges may offset the gains made by going with a lender who offers a very low rate, making a lender with a higher rate of interest but few ancillary fees a better deal in the long run.
Don’t forget to consider the actual amount of each installment payment, and make sure the business can afford to manage those payments in a timely manner. This is very important when evaluating different capital equipment financing arrangements, since many lenders who extend capital equipment financing reserve the right to increase interest rates as well as impose penalties when payments are made after the due date. If you want to keep on track with the payments and not incur additional fees, go for a repayment structure that you can meet, even if it takes some time for the equipment purchased to begin generating revenue.
