Do Interest Rates Impact Equipment Finance?

Interest rates can affect the cost of borrowing for businesses. The right interest rate can make all the difference in keeping your cash flow healthy and meeting your equipment needs. 

If you’re applying for an equipment finance loan, understanding how interest rates affect your payments helps you make informed financial decisions. In this guide, we’ll break down how interest rates can shape your financing options, and offer tips to help you secure the best terms.

What Is Equipment Finance?

Equipment finance allows businesses to acquire the machinery, technology, or vehicles they need to grow without having to pay the full purchase price upfront. Instead, businesses secure funding through a business loan or lease, paying off the cost of the equipment over time.

The common types of equipment finance leases include finance leases, hire purchase agreement, operating lease, and chattel mortgage. Businesses often prefer financing over outright purchases because it conserves capital, enabling them to maintain cash flow.

The Role of Interest Rates in Equipment Finance

Interest rates, typically expressed as a percentage of the loan amount, reflect the cost of borrowing funds. Determined by central bank policies, market demand, and other economic factors, these rates directly affect the total expense of an equipment finance loan.

When equipment finance interest rates rise, the cost of borrowing increases, leading to higher monthly payments and financing costs. Conversely, lower interest rates can make financing more affordable, but the volatility can pose challenges for long-term planning.

Factors Affecting Interest Rates in Equipment Finance

Interest rates play a key role in equipment finance, directly impacting the total cost of your business loan or lease. Here are the main factors that affect interest rates:

1. Credit Score and History: A strong credit score can help secure lower interest rates, as it shows the lender that your business is reliable.
2. Type of Equipment: Equipment that retains its value, like machinery or vehicles, may result in lower rates. Depreciating equipment may lead to higher rates.
3. Loan Term: Shorter terms generally have lower rates, while longer terms may carry higher rates due to more risk for the lender.
4. Business Financial Health: Strong financials, cash flow, and profitability can lead to better rates. New or financially unstable businesses may face higher rates.
5. Economic Conditions: Broader economic factors like inflation or central bank rates influence interest rates. During uncertain economic times, rates may rise.
6. Down Payment or Deposit: Larger down payments lower the loan amount and reduce risk, often leading to lower interest rates.
7. Collateral: Offering collateral can lower interest rates, as it reduces the lender’s risk.
8. Industry and Business Type: High-risk industries may face higher rates, while stable industries may receive lower rates due to perceived lower risk.

How Interest Rates Impact Different Types of Equipment Finance

Finance Lease

When entering a finance lease, the choice between fixed and variable rates can significantly influence your costs. Fixed rates provide stability, locking in payments regardless of market fluctuations, whereas variable rates can lead to cost savings or increases depending on market trends.

Operating Lease

While operating leases often have less direct exposure to interest rate changes, these rates can impact the availability of favourable lease terms. Leases may become more expensive or less accessible when business loan interest rates in Australia rise, affecting the overall lease market.

Hire Purchase

Interest rates play a critical role in commercial hire purchase agreements, determining both the structure and total expense of the purchase. Since hire purchase agreements extend over several years, even minor rate fluctuations can notably affect the total cost of equipment acquisition.

Chattel Mortgage

For a chattel mortgage, interest rates influence monthly repayments and the overall financial burden. Businesses may also find opportunities for tax deductions based on the interest paid, making it essential to assess the impact of rates on potential savings.

Proven Strategies for Managing Interest Rate Impact

1. Fixed vs. Variable Rates

Choosing between fixed and variable rates is essential: fixed rates offer payment predictability, aiding financial planning, while variable rates may offer savings in favourable market conditions. Businesses must weigh these considerations against their risk tolerance and future plans.

2. Refinancing Options

During periods of falling interest rates, refinancing business loans can present cost-saving opportunities. By securing a lower rate, businesses can reduce their payments and even shorten their finance term.

3. Interest Rate Hedging

Interest rate hedging strategies, like futures contracts or interest rate swaps, can shield businesses from adverse rate movements. While potentially complex, such measures offer significant protection against increasing borrowing costs.

4. Negotiation Tips

Proactively negotiating with lenders is key to obtaining favourable rates and terms. Businesses should present strong credit histories, offer substantial down payments, or consolidate borrowing needs to leverage more attractive equipment finance rates.

Get the Best Equipment Financing Terms with Cabbage Capital

Understanding the factors that impact interest rates in equipment finance is key to securing the best deal for your business. Whether it’s improving your credit, choosing the right equipment, or offering collateral, every step you take can influence your financing terms.

Cabbage Capital specialises in helping Melbourne businesses find the most competitive financing options. Let us help you simplify the process and get the equipment you need at terms that work for your business. Contact Cabbage Capital today to secure the best rates for your business!