Used Equipment Financing: How High are the Rates?

I got a call today from a gentleman with a simple question:

"Do you finance used equipment?"

I replied with a simple answer:

"Yes."

It's always funny when I hear that question, because the truth is, most of the equipment we finance is used.

We get that question a lot, though, because it turns out there are quite a few leasing companies that refuse to offer used equipment financing.  

Why Do Some Companies Not Offer Used Equipment Loans? 

Here's a discussion you don't see on many websites:

What happens if we have to repossess your equipment?

Nobody likes talking about this, because quite honestly, for most equipment financing companies, nobody is happy when loans go into default.

Notice, I said *most*....

There are a few companies out there that are set up to actually make extra money off of you if you go into default, which is a really ugly practice, but it does exist.

Many companies in the industry, however, are run by good people who are out to help small business owners, as opposed to be out to put the screws to you.

With that being said, a certain percentage of the borrowers will end up in the situation of not being able to pay for their equipment at some point, and here's what happens:

 1.  Hopefully, the equipment can actually be found.

2. Money has to be paid to someone to go repo your equipment.

3. Storage fees have to be paid until the equipment can be liquidated.

4. The equipment will be liquidated at an auction, most of the time for way, way less than you paid for it.

For an example of this, check out any equipment auction at Machinery Trader and then compare the asking price for similar equipment.

It goes without saying that the newer the equipment is, the easier it is to get rid of.

The way most finance companies deal with this issue is by increasing your rate a little bit to offset the risk.

How Much Higher are Payments With Used Equipment Leasing Companies?

The answer really depends on a lot of factors.

One of the most important questions:

How old is the equipment?

In most cases, for most equipment under 10 years old, we won't bat even an eyelash at you, and if rates are higher than they would be for brand new equipment, the difference is barely a smidgeon.

As the equipment gets much older than 10 years, however, not only is it harder to sell if a lender is forced to recover the equipment, but the chances of the equipment going kaput (which means you stop using it to generate revenue) go up dramatically, so the older the equipment is, the harder it is to get financed.

(But it's almost never impossible)

The answer to how much higher the rates can go when you finance equipment more than 10 years old really depends on you.

In general, the better your credit, the bigger the impact on payments as equipment gets older.

Really.

The reason for this is simple:

If you have fabulous credit, good revenues, and some time in business, there are some fabulous financing options that are quite reasonable...

...and the bank sources that offer those fabulous options have absolutely no interest in financing equipment that's older than 15 years or so.

The impact on payments for older equipment in these situations can be substantial - where you might be able to see financing charges in the 5-6% a year range buying newer equipment, with older equipment the rates on an annualized basis could easily go up to 8% or so. 

What about Used Equipment Financing With Bad Credit? 

If you have bad credit, depending on how bad your credit is, equipment age often won't really have a big impact on the rates.

The reason for this is simple:

The rates you'll pay to finance or lease equipment when you have bad credit already factor in a large amount of risk.

 (In technical terms, if you have lousy credit, the rates you will pay if you can acquire financing are going to stink...)

If you're in the middle, not an A+ borrower, but not a D-borrower either, the rates you pay will probably be a little higher, but will not really have very large of an impact on your payments. 

Are there Any Other Impacts When You Finance Used Equipment?

One big impact is taxes:

The older the equipment is, the less likely it is that you'll be able to do a lease - often times the only way a company will be willing to do the financing is as a loan (meaning you own the equipment at the end for a $1 buyout, as opposed to some balloon payment).

When you do a loan rather than a lease, you lose the ability to write off the entire payments as an operating expense on your taxes.

This can sometimes have an impact, but in most cases, when our customers are buying older equipment, the cost savings of buying used vs. new equipment is so substantial that the difference in price more than offsets any difference in financing charges or taxation.

Do You Need a Quote to Finance Used Equipment? Just Click on the Picture Below or Call Us at (866) 631-9996.