One of the most common questions that I receive from a new client who is looking for plant and equipment finance for say a new truck or piece of machinery is what’s the interest rate?
And it’s a certainly great question and one I find personally to be a real educational piece for business owners and what we do as finance brokers simply because there are so many variables that can impact the interest rate when it comes to plant and equipment finance.
Generally speaking these discussions will have been triggered by an interest rate that the client has seen advertised somewhere in the market place. The conversation normally goes a little something like this “Can you do 3.99% on a 1989 Truck? I can get that rate elsewhere!”.
The short answer to this is unfortunately no and this is where the education process now begins.
Below are my top 6 factors that can impact plant & equipment interest rates outside of the fluctuations in the cash rate!
• Age of the Goods
The reason I unfortunately cannot provide home loan rates on a 1989 Truck is because banks and financiers risk rate loans based on the age of the asset. For example, you will normally find assets up to 3 years of age will be classified as new under a banks or financiers policy and will therefore naturally attract a sharper interest rate.
Why you ask?
Well, from a risk perspective and in an absolutely worst case scenario where the bank needs to re-possess & re-sell the asset, there are generally more buyers for newer equipment than older equipment meaning they may make less of a loss.
• Type of Goods Being Purchased
Some banks or financiers classify goods (also commonly referred to as assets or security against a finance loan) into different classes or categories. Basically these categories may look a little something like this:
A Class Security Goods such as Cars, Trucks, Trailers & Machines.
B Class Security Goods such as non register-able forms of equipment such as lathes, forklifts etc.
C Class Security Goods are the least desired type of goods and generally include fit-outs, catering equipment and technology assets (or generally equipment that doesn’t have a strong secondary market.)
Interest rates and categories then generally work in the exact same order with A Class Goods attracting the sharpest interest rates based on reasons explained in the point above. Basically, it’s all about risk, following the trend?
• The Financier Providing the Funding or Finance Loan
That’s right unfortunately not all banks and financiers offer the same interest rates on all plant and equipment. The reason for this is that some banks and financiers may have a greater appetite for certain types of plant and equipment than others which may mean that they will vary their interest rates based on what you want to buy.
Also, generally speaking not every bank will accept your application for finance which might limit what interest rate is on offer to you.
The variables here are endless but some rules of thumb about financiers and interest rates are as follows:
• The Length of the Loan
This one can sometimes be contradictory .. so I’m going to give you the facts rather than trying to go into an in-depth explanation here. The simple fact is that some banks will offer a better interest rate over a shorter term & some won’t! Are you confused yet? Well you should be.
My theory here is that the ones who offer better rates over shorter terms are purely looking at the forecasted cash rate over a period of time and are happy to lock in your loan at a better rate based on market interest rates remaining relatively constant.
The financiers or banks that are marginally higher I feel may be looking for a better return on investment i.e. locking in money for a shorter period of time at a very low rate may not mean as great a return on their money.
It’s probably a topic for another blog post but if you are wondering the length of a typical loan, generally its 12-84 months but again this can be dependent on the type of asset as well as the financier or bank looking at the loan.
• The Amount You Borrow
This could also be considered like a sliding scale in that the more that you borrow will attract a sharper interest rate. Generally banks and financiers might have different borrowing amount brackets ie 0-$20,000 or $150,000 +…. you get the idea.
• How Established is Your Business
Please don’t take offence to this one because we are all at different stages in business and that is what makes business awesome! However, if you do have an established business and are smashing it with the numbers then this may give me a chance to negotiate a little more aggressively with banks about what they can do for you in terms of the interest rate. Bear in mind however, that the banks do have a margin to maintain and are not in the business of discounting on every transaction & will therefore need a convincing explanation around why they should provide a discount on a particular loan.
Moral of the story is that, the stronger your business becomes overtime the more options and leverage you will have to gain access to better interest rates for plant and equipment finance.
Of course, there are many variables that can impact interest rates outside of these 6 factors however I find these to be the most common factors that can impact the interest rate for plant and equipment finance.
If you have a plant or equipment finance or business scenario that you would like to discuss with me please don’t hesitate to contact me on 0431 177 605 or via the contact us form.