There are basically four levels of small business equipment financing where the financing required is no greater than $250,000.
The first level is obviously provided by traditional banks through both loan and leasing programs. In Canada, the chartered banks will make equipment loans via the small business loan program insured by the Federal government for total acquisition costs of no greater than $250,000.
These loans get financed at around 5.5% at the present time, or roughly prime plus 3%. Because this is considered very low interest rate borrowing, even though the debt is partially insured by the government, there is a fair bit of qualifying required. And even for those that do qualify, the amount of financing provided tends to range from 65% to 75% of the equipment acquisition and placement costs.
Some of the banks also have a leasing division that works outside of their commercial loan programs and administered at a head office level. While banks can provide equipment leases for smaller ticket amounts more common with small business, these programs are more focused on larger ticket amounts where the objective is to use low cost, high ratio lease financing to attract new commercial clients to the bank.
The second level of equipment financing is still through institutional lenders and is typically between 6% to 10% interest range. These are term loans that have similar qualifying requirements as the first level, but are more designed for larger value loans that don’t quite fit into the bank qualifications. These types of programs will also consider one off transactions in most cases.
The third level is equipment leasing from leasing companies where most financing requests considered are no greater than $150,000. The best interest rates from this group range in the 9% to 14% range and while higher than traditional bank loans, can provide financing amounts in excess of 100% of the equipment, delivery, and installation costs for strong financial and credit profiles. So for many small businesses, the higher costs of financing is a trade off for greater equipment financing and leasing leverage.
There is a second tier in this type of financing where weaker financing profiles will be considered in rate ranges from 15% to 20%. The leasing decisions tend to be very subjective on the part of the leasing companies which can make it very difficult to predict which of these companies will be interested in any particular deal.
The fourth level of equipment financing and leasing is pure asset based lenders that are strictly focused on the liquidation value of the equipment and tend to provide equipment leasing rates in the 18% to 25% financing range.
While there are a number of financing sources in the small business equipment financing and leasing space, the individual lender criteria can change constantly, especially with companies that hold smaller portfolios that can easily be impacted by changes in rate or even slight increases in arrears accounts.
And being able to qualify for lower cost financing can be a very point in time event whereby at certain points in time, a business scenario can qualify for lower financing rates and at other times, the exact same scenario will not.
If you have an equipment financing or leasing requirement for small or large ticket items, please give me a call so I can quickly assess your requirements and provide relevant options for your consideration.