Equipment finance interest rates are different from home loan rates. In Australia, equipment loans are calculated on associated risks. Much of the public are unaware of this and think the rates are calculated in the same manner as a home loan. Banks & lenders criteria vary considerably but the general rule is, the higher the risk, the higher the interest rate and fees. More simply put, they price to risk. Always keep in mind that your assessment of risk may differ from the lender’s perception.
Criteria for Equipment Finance Interest Rates
So what is the criteria for risk in the eyes of the lender? Based on the current lending market Will Finance have put together a 6 core lending criteria guide for the equipment finance industry in Australia.
1. Time in business
How long have you been in business for? The lenders want to know how long you have been in business for and how long you have been in the industry. The lender verifies this information using your ABN number. A simple ABN lookup will confirm how long the business has been registered for and just as important, is the business registered for GST. When your business has annual gross GST turnover of $75,000 or more it is required to be registered for GST. If your business is not registered for GST your lending options are dramatically reduced and your borrowing amount is usually capped at $30K. To obtain the best interest rate most competitive lenders will require your ABN and GST to be registered for a minimum of 2 years. Business that has been registered for less than 2 years can expect to pay higher equipment finance interest rates as the banks perceive this as a higher risk lending transaction.
2. Property Ownership
Are you a property owner? Owning residential property is not essential for equipment finance approval. It will however, provide stronger negotiating power for your finance broker to get you the best rates. Owning your own property increases your overall financial position on your statement of assets and liabilities. Property ownership also shows good account conduct with a willingness to repay debt. Some lenders may require a 20% deposit if you do not own residential property.
3. Dealer or Private, New or Used
Is the asset being purchased from a dealer or private? Is the asset new or used? Lenders will base rates better on brand-new assets from a dealer or recognised supplier better than a second hand, privately purchased asset. Equipment loans are secured lending products. This means the asset you are purchasing is going to be used as security for the loan. The better condition of the asset, the less risk for the lender. The newer the asset, the better the equipment finance interest rates. This is the rule for most lenders however there are some lenders where the rate for second hand and brand-new assets are very similar. Get the best advice by talking to your accountant and equipment finance broker before purchasing second hand assets for your business.
4. Credit Score
What is your Credit Score and are there any adverse findings on your credit report? It is a legal requirement in Australia for the lender to enquire about the client’s most recent credit report. A credit report is a summary of how you have handled credit accounts, including the types of accounts and your payment history. It includes other information that is reported to credit bureaus by your lenders and creditors. Some non-bank lenders have different lending criteria to your traditional major banks. More efficient non bank lenders base their pricing and approval from a minimum credit score of 500-600. Credit scores range from 0 to 1200, with 1200 being the perfect score. An average score is approximately 600 with most lenders viewing scores below 500 as higher risk borrowers.
5. Loan Structure
How much do you want to borrow and how long is the loan term for? Two of the key components to loan structure that contribute to your equipment finance interest rates are the term of the loan and the total loan amount.
TERM: The shorter the term of the loan the lower the interest rate. Equipment Finance products are usually a maximum 5-year term. However, there are some lenders willing to go as far as 7 years. The shortest term for asset finance is usually 24 months.
LOAN AMOUNT: The higher the loan amount, the lower your equipment finance interest rates. For example a loan for $50k will attract a higher interest rate than a loan for $100K.
So, the shorter the loan term and higher the loan amount, the better your interest rate should be. For example, 5 year loan for 50K will attract a higher rate than a 2 year loan for $100K.
6. Ability to repay the loan
Like any other loan you need to be able to prove your ability to repay the debt. The better your financial performance, the better your equipment finance interest rates should be. You need to prove your ability to repay the loan with verifiable documents such as tax returns, financial statements or 6 months bank statements. This will allow your business finance broker to be in a better position to negotiate better rates. It shows evidence of your ability to service the proposed new debt.
Tips for equipment finance interest rates
Non bank lending institutions are a wise consideration when sourcing the best equipment finance for your business. The Hayne Royal Banking Commission has been a welcome ‘wake-up call’ for the industry. There is now recognition of how many non bank lenders are progressive with innovation and competitive rates & services. These lenders often do not have the high overheads and salaries of most traditional banks, hence providing low attractive interest rates. The non-bank lenders have also set the foundations for speed-to-market. They have been instrumental with ‘breaking the way’ in how Australia’s future finance applications work. This creation of innovated technology is allowing the lender to increase time for approval and decision as fast as 4hrs.
TERMINOLOGY; Don’t get confused with the variance of terminology. Equipment Finance is commonly referred to as Chattel Mortgage within the banking fraternity. It is also often referred to as ‘asset finance’. Different names are used by different lenders but they are all equipment finance terms for lending for business assets.
Equipment Finance Interest Rates differ from Home Loans
Remember Equipment Finance is different to home lending. The higher the risk, the higher the equipment finance interest rates. Many people forget that asset finance is a type of business loan. Most lenders have one equipment loan product, and that product differs in interest rate and loan structure. Home lending has multiple lending products with less variance of interest rates than equipment finance. Presently, equipment finance interest rates vary from 2.80% to 22% depending on how risky the lender determines your loan to be. The more information your broker or lender has surrounding your character, collateral, and capacity, the better position you are in to obtain the best rate and deal. The lower the risk, the better the rate.
Remember that Equipment finance is a business lending product and is very different to applying for a residential mortgage. Presently there are many lenders and lending products offered at historically low interest rates. A specialist finance broker will save you time and source you the best rates & deals. Will Finance Pty Ltd is a Business Finance Broker who specialise in Equipment Finance. For any enquiries contact us.