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How Much Does Equipment Financing Cost? Rates and Fees Explained
Understand the true cost of equipment financing including interest rates, fees, and total repayment. Compare options to get the best deal for your business.
Understanding the true cost of equipment financing is essential for making smart business decisions.
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You have likely noticed that the advertised interest rate is rarely the final number on your repayment schedule. Various fees, deposit requirements, and tax implications shift the math significantly.
We see this confusion often with business owners in Dallas who assume the lowest rate always equals the cheapest loan. That is frequently not the case.
This guide breaks down the real equipment financing costs so you can compare options effectively.
The Components of Equipment Financing Cost
The total expense of your loan consists of several moving parts.
Key cost components include:
- Interest rate or factor rate - The primary cost of borrowing capital.
- Origination fees - Upfront charges for processing the file.
- Documentation fees - Administrative costs for preparing contracts.
- Down payment - Your initial cash investment (typically 0% to 20%).
- Soft costs - Taxes, shipping, and installation fees (often excluded from financing).
- Prepayment penalties - Charges for paying off the debt early.
We find that most borrowers overlook “soft costs.” Shipping and installation alone can add 10-20% to the project total, and not all lenders finance these amounts.
Interest Rates vs. Factor Rates
Equipment financing uses two different pricing structures: interest rates and factor rates.
Understanding the difference is the single most important step in comparing offers.
Interest Rates (APR)
Traditional equipment loans use annual percentage rates (APR). Interest accrues on the outstanding balance, which means your interest charges decrease as you pay down the principal.
We typically see these ranges for bank-style loans in the current economic climate:
- Excellent credit (720+): 7% - 10% APR
- Good credit (680-719): 10% - 16% APR
- Fair credit (620-679): 16% - 25% APR
- Poor credit (below 620): 25% - 35%+ APR
Note: These ranges fluctuate based on the Federal Reserve’s Prime Rate.
Factor Rates
Some lenders use factor rates instead of an APR, particularly for fast-approval loans or Merchant Cash Advances (MCAs). A factor rate is a simple decimal multiplier applied to the total loan amount.
How factor rates calculate total cost:
- The Math: Loan Amount x Factor Rate = Total Payback Amount.
- Example A: $100,000 x 1.15 = $115,000 total repayment.
- Example B: $100,000 x 1.25 = $125,000 total repayment.
Important distinction: Factor rates do not amortize. You owe the full fee the moment you sign, regardless of how quickly you pay it back.
Converting Factor Rates to APR
Comparing a factor rate to an APR is difficult because factor rates assume a shorter term.
We use this approximation table to help clients see the “true” annual cost:
| Factor Rate | 6-Month Term APR | 12-Month Term APR |
|---|---|---|
| 1.10 | ~35% | ~18% |
| 1.15 | ~54% | ~28% |
| 1.20 | ~73% | ~38% |
| 1.25 | ~91% | ~48% |
These are estimates. The shorter the term, the higher the effective APR.
Understanding Fees
Origination Fees
Most equipment loans include an origination fee. This is a percentage of the loan amount charged upfront for processing the application and underwriting the file.
Standard market rates:
- Bank loans: 0.5% to 2%
- Alternative lenders: 2% to 5%
Real-world impact: On a $100,000 excavator loan, a 2.5% origination fee adds $2,500 to your cost immediately. Some lenders deduct this from the proceeds, meaning you only receive $97,500.
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Documentation Fees
These cover the administrative costs of drawing up the legal paperwork.
We see these fees range from $250 to $750 depending on the complexity of the deal.
Application Fees
Some lenders charge non-refundable fees just to look at your paperwork.
Our stance: Equipment Financing Dallas Pros never charges application fees. We believe you should not pay just to find out if you qualify.
UCC Filing Fees
Lenders almost always file a UCC-1 financing statement to secure their interest in the equipment.
State filing fees vary, but you should budget between $25 and $100 per filing. This public record prevents you from using the same equipment as collateral for another loan.
Prepayment Penalties
Some loans penalize you for paying off the debt early. This is designed to protect the lender’s expected profit.
Common penalty structures:
- Yield Maintenance: You must pay all remaining interest due on the contract.
- Declining Scale: 3% fee in year one, 2% in year two, 1% in year three.
- Simple Flat Fee: A percentage of the remaining balance (often 1-3%).
Always check the “Early Termination” clause in your contract.
Total Cost Calculation Examples
Let’s compare the total cost of different financing scenarios for a $100,000 equipment purchase to see how terms affect your bottom line.
Scenario 1: Bank Equipment Loan
This option usually requires high credit and complete financial documentation.
- Amount: $100,000
- Rate: 9% APR
- Term: 60 months
- Origination fee: 1% ($1,000)
- Monthly Payment: ~$2,075
Total Cost Breakdown:
- Total Payments: $124,500
- Origination Fee: $1,000
- Total Cost of Borrowing: $125,500
Scenario 2: Alternative Lender (Factor Rate)
This option offers speed and requires less paperwork but comes at a premium.
- Amount: $100,000
- Factor Rate: 1.22
- Term: 18 months (Daily/Weekly payments)
- Origination fee: 3% ($3,000)
- Daily Payment: ~$300 (assuming 21 days/month)
Total Cost Breakdown:
- Total Payback: $122,000
- Origination Fee: $3,000
- Total Cost of Borrowing: $125,000
Analysis: While the total dollar cost is similar to Scenario 1, you must pay it back in 1.5 years instead of 5 years. This creates a massive strain on weekly cash flow.
Scenario 3: Fair Market Value (FMV) Lease
This structure offers lower monthly payments with a purchase option at the end.
- Equipment value: $100,000
- Monthly payment: $1,850
- Term: 60 months
- Residual Value: Fair Market Value (Estimated at 15%)
Total Cost Breakdown:
- Total Payments: $111,000
- Estimated Buyout: $15,000
- Total Cost to Own: $126,000
Leasing often provides tax advantages that can offset the slightly higher total cost.
Factors That Affect Your Rate
Lenders view your application through a risk assessment lens.
Credit Score (FICO & SBSS)
Your personal credit score is critical, but lenders also look at your SBSS (FICO Small Business Scoring Service) score.
| Credit Range | Typical Availability |
|---|---|
| 720+ | Prime rates, bank-level financing |
| 660-719 | Standard rates, broad lender access |
| 620-659 | Tier 2 rates, stricter terms |
| Below 620 | High-risk pricing, collateral required |
Time in Business
Lenders prefer stability. Statistics show that businesses fail most often within the first two years.
We generally see the “magic number” at two years. Once you pass that 24-month mark, you qualify for significantly better “seasoned business” rates. Startups (under 6 months) often require 20-30% down payments.
Equipment Type & Age
The asset itself dictates the risk.
- Yellow Iron (Construction): Holds value well. Lower rates.
- Vehicles: Easy to resell. Standard rates.
- Technology/Computers: Depreciates instantly. Higher rates or shorter terms.
- Used Equipment: If the gear is over 10 years old, many banks will not finance it, pushing you toward alternative lenders with higher rates.
Debt Service Coverage Ratio (DSCR)
Lenders look at your cash flow, not just your revenue.
They want to see a DSCR of 1.25x or higher. This means for every $1.00 of debt payment, your business has $1.25 in available cash flow to cover it.
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How to Get the Best Rate
1. Leverage Section 179 Tax Deductions
The tax code can effectively lower your equipment cost. Under Section 179 (for 2024/2025), you can often deduct the full purchase price of qualifying equipment from your gross income.
The Benefit: If you are in a 25% tax bracket and buy $100,000 in equipment, saving $25,000 in taxes effectively lowers your “real” cost to $75,000.
2. Shop Multiple Lenders
Banks, online lenders, and equipment dealers all have different “buy boxes.”
We recommend getting at least three distinct quotes. One lender might specialize in medical devices while another favors construction; their rates for the exact same borrower can differ by 4-5%.
3. Make a Larger Down Payment
Equity reduces risk.
Offering 20% down instead of 5% can sometimes drop your interest rate by 1-2 percentage points because the lender has more security.
4. Clean Up Your Business Credit
Check your profile with Dun & Bradstreet or Experian Business before applying.
Simple errors, like an incorrect address or an outdated trade line, can drag down your score. Fixing these before the underwriter sees them is a quick win.
Hidden Costs to Watch For
Beyond the obvious rates, watch for these specific line items in the fine print.
Interim Rent
If your equipment is delivered on the 10th, but your lease officially starts on the 1st of the next month, the lender may charge “interim rent” for those 20 days.
This is a daily prorated charge that often catches borrowers by surprise.
Insurance Requirements
Lenders require you to carry insurance on the asset listing them as “loss payee.”
If you do not provide proof of insurance immediately, they will add “force-placed insurance” to your monthly bill. This coverage is typically 2-3 times more expensive than your own policy.
Maintenance Covenants
Some contracts for heavy machinery require specific maintenance schedules.
Failure to provide proof of service (like oil changes or recalibration) can technically put the loan in default.
Total Cost of Ownership (TCO)
The financing rate is only one piece of the puzzle.
You must calculate the TCO to make a profitable decision:
- Financing: Principal + Interest + Fees.
- Operation: Energy consumption and operator wages.
- Maintenance: Routine service and emergency repairs.
- Downtime: The cost of lost production during setup.
- Resale: The recoverable value after 5 years.
We advise clients to look at the “cost per hour” or “cost per unit produced” rather than just the monthly loan payment. A cheap machine with a high interest rate might still be more profitable than an expensive machine with a 0% loan if the productivity difference is high enough.
Get a Transparent Quote
At Equipment Financing Dallas Pros, we prioritize clarity over confusion.
You deserve to know exactly what you are paying. When you request a quote from our team, we provide:
- Clear distinction between APR and factor rates.
- Itemized list of all origination and doc fees.
- Total repayment amount displayed clearly.
- Explanation of prepayment privileges.
Ready to see exactly what equipment financing will cost for your Dallas business? Contact us for a free, no-obligation quote. We will walk you through the numbers so you can sign with confidence.