Types of Industries and Equipment

This one tends to surprise a lot of people. Depending on what type of equipment you are looking to purchase your interest rate will vary. “Type” refers to:

• New vs. Used
• Industry Type
• Hard Costs vs. Soft Costs

The main reason that lenders look at equipment “type” when pricing out a lease or loan is that they need to consider what the resale value for the equipment will be in case of default and price their profit in accordingly. New equipment tends to fetch a lower interest rate than used equipment because its resale value is higher and it is more likely to sell. Equipment with heavy installation costs, but not a lot of hardware would demand a higher interest rate because it will be difficult (impossible) to resell installation costs.

For example, let’s say you were looking to purchase a highly specialized machine that is used by less than 1% of all of your industry, which amounts to about 100 people in this world. If you were to default and the lender had to collect that equipment and resell it, it would be very difficult because there isn’t heavy demand for it. On the other hand, if you were to buy a fairly standard machine used by a good majority of your industry, and your industry was doing relatively well during the current economic cycle, then that equipment would be much easier to resell.

The reason this concept can be so difficult to swallow is that most business owners know their equipment very well. And those business owners also tend to know other business owners in the industry that would buy their used equipment in a heart beat. Lenders don’t have the same knowledge and contacts as you do. So the likelihood that piece of equipment will sit in their stockpile for a length of time is high.

Types of industries and equipment that are generally considered to be “good” collateral include:

• Manufacturing Equipment

• Production Equipment

• Printing Equipment

• Automotive Equipment

• Transportation Equipment

• Packaging Equipment

• Machine Tool Equipment

• Medical Equipment

• Construction Equipment

• Dental Equipment

If your equipment category is not listed above, worry not. Most new equipment will get a low interest rate regardless of it’s type, it’s just that some types are more coveted than others. When budgeting for your equipment purchases, keep in mind what type of equipment you will be buying. If you plan on buying used equipment make sure to add a premium on your interest rate of around 150 to 300 basis points above what new equipment rates are. This will provide for a more accurate forecast.