Commercial equipment financing options come in many shapes and sizes, so it’s essential to understand the terms of your financing agreement before you sign. One of the most important aspects affects the interest you’ll pay on your lease or loan. While you’ll mostly see fixed interest rates for equipment loans, it’s also possible to get a variable-rate equipment loan. But what does this mean? And which option is best for your business?
In this article, we’ll discuss the difference between fixed and variable interest rates and explain why a fixed interest rate is usually the best option for equipment financing.
Fixed Versus Variable Interest Rates: What’s the Difference?
Fixed Interest Rates
A fixed interest rate means you will pay the same percentage of interest each period. The interest rate is locked in, so no matter what happens to the market or the lender’s general interest rates, you will pay that fixed rate for the entire duration of your financing term.
Variable Interest Rates
If your loan has a variable interest rate, then the interest rate will move up or down based on changes in the market. Usually, the variable interest rate is tied to an index rate, which is a benchmark rate that’s based on market factors.
The benefit of variable interest rates is that if the market rates decrease, so will the interest rate on your loan. Of course, the reverse is also true; if market rates go up, so will your interest payments.
Why Fixed Interest Rates Are Usually Best for Equipment Financing
Most commercial equipment financing options have fixed interest rates, and for good reason. With a fixed interest rate, you can predict exactly how much you’ll be paying each period and how much your financing will cost you over the long run. This knowledge allows you to fine-tune your financials and budgeting to fit your business needs, and it also removes any surprises from the financing process.
With equipment financing, most business owners know exactly how much money they need. They’re looking to acquire a specific type of equipment and use it for a specific length of time. Fixed interest rates line up perfectly with these businesses’ need for financial predictability. When combined with fixed interest rates, equipment loans and leases help businesses of all types achieve accurate budgeting and financial planning.
In general, it’s best to match the length of the financing term to the useful life of the equipment you’re purchasing. When you combine an appropriate financing term with a fixed interest rate, you set your company up for accurate budgeting based on established best practices.
Financing options with variable interest rates still have their uses. Many businesses use these lines of credit to finance receivables and inventory on a short-term basis, and your business may want to consider doing the same where it makes sense.
Team Financial Group Offers A Variety of Equipment Financing Options to Fit Your Needs
At Team Financial Group, we offer leases and finance agreements that we can customize to fit your unique business needs. We’re dedicated to helping our clients grow and thrive by providing efficient and flexible financing options and personalized service.
Ready to get started? Applying is easy! Just visit our application page, fill out your contact information, and one of our commercial financing experts will get in touch to help walk you through the application process and determine which option is right for you.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.