Impact of Interest Rates on Equipment Financing

Interest rates directly influence the cost of financing equipment for businesses. Higher rates increase monthly payments, while lower rates reduce borrowing costs, enabling businesses to invest more confidently. In 2025, the Federal Reserve cut rates by 50 basis points in June, creating opportunities for businesses to secure better financing terms. Equipment financing rates typically range from 4% to 25%, depending on factors like credit scores and loan terms.

Key takeaways:

• Rising rates lead to higher payments, impacting cash flow and delaying investments.

• Lower rates encourage businesses to refinance, upgrade, or expand operations.

• Fixed-rate loans provide predictable payments, while variable-rate loans offer flexibility during rate declines.

• Equipment financing costs vary widely, with lenders like banks offering lower rates but stricter qualifications compared to online lenders.

For example, a 5% vs. 10% interest rate on a $50,000 loan over five years adds $7,127.40 in total costs. Businesses must weigh their options carefully, considering leasing, vendor programs, and alternative financing to manage costs effectively. Leveraging tools to grow revenue can further offset higher financing expenses.

Everything You Need to Know About Equipment Financing Interest Rates (2023)

Interest Rate Trends and Local Service Businesses

The Federal Reserve's monetary policy decisions in 2025 are shaping the way local service businesses approach equipment financing. Understanding these trends is crucial for making smart financing choices and planning future investments.

Recent and Projected Interest Rate Changes

In 2025, the Federal Reserve has maintained interest rates between 4.25% and 4.50%, following a 1% rate cut in late 2024 [6]. Fed Chair Jerome Powell highlighted the uncertainty surrounding these policies, stating:

"All of these policies are still evolving, however, and their effects on the economy remain highly uncertain." [5]

Core inflation rose to 2.7% in May 2025 [6], while unemployment dropped to 4.1% [7]. Looking ahead, investors predict about 1.5 additional rate cuts by the end of 2025, despite earlier expectations of just two cuts for the year [3]. These shifts in monetary policy directly impact how service businesses strategize their financing.

Impact on Local Service Industries

Interest rate trends, combined with industry-specific factors, are significantly influencing financing decisions for local service businesses. The steady rate environment has encouraged a surge in equipment investments. Early in 2025, equipment and software investments grew by nearly 22% on an annualized basis, reflecting renewed business confidence after years of cautious spending [8].

Labor challenges are also driving the need for financing. According to a survey by the Equipment Leasing & Finance Foundation, 32% of businesses cited labor costs or shortages as the main reason for financing additional equipment in 2025 [3]. Furthermore, 42% of businesses expect to increase their equipment and software purchases over the next year, compared to just 15% that foresee a decline [3]. Leasing remains a popular option, accounting for 25% of total purchase volume in 2023, while banks supplied 59% of the total equipment financing that year [3].

Optimism within the industry is tied to expectations of slight rate improvements. Leigh Lytle, president and CEO of the Equipment Leasing and Finance Association, commented:

"We're in the soft-landing camp and expect lower interest rates to help keep demand for equipment financing healthy, even as the economy is expected to cool. Credit quality in the industry remains very healthy, with charge-offs low and late payments rising to a level consistent with a moderately cooling economy." [1]

The growing role of technology also plays a key part in financing decisions. A notable 42% of businesses plan to incorporate generative AI into their operations within the next two years [3]. This reflects a broader shift toward adopting advanced technologies to boost productivity and address labor challenges.

The combination of steady interest rates, labor market pressures, and increasing technological adoption highlights the importance of strategic financing. For local service businesses, adapting to these evolving conditions is essential for staying competitive and meeting future demands.

How Interest Rates Change Equipment Financing Costs

Interest rates play a key role in determining the overall cost of financing equipment. For instance, the difference between a 5% and 10% interest rate can add thousands of dollars to the total cost of a loan, impacting both cash flow and profitability.

Fixed-Rate vs. Variable-Rate Financing

With fixed-rate financing, your interest rate stays the same throughout the loan term, providing predictable payments no matter how the economy shifts. Many commercial equipment financing options come with fixed rates [9], offering businesses the financial stability they need to plan effectively.

"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." - Team Financial Group [9]

On the other hand, variable-rate financing links your interest rate to market conditions, often following indexes like the prime rate. While this introduces uncertainty in monthly payments, it can save money when rates drop. For example, SBA 7(a) loans typically offer variable rates, though some lenders also provide fixed-rate options [12]. Fixed-rate loans lock in your rate and payment amount, while variable-rate loans adjust with market changes, leading to fluctuating payments [10] [11].

Payment Examples at Different Interest Rates

To see how interest rates affect financing costs, here’s a comparison of monthly payments for typical equipment loan amounts over a 5-year term:

The differences add up. For a $50,000 loan, the jump from a 5% to a 10% interest rate means paying $7,127.40 more over five years. That’s money that could be used to grow your business, pay employees, or invest in additional equipment.

Interest rates for equipment loans vary widely, from as low as 4% to as high as 45% [13]. The rate you get depends on factors like your credit score, business history, the type of equipment, and your choice of lender. Banks and credit unions tend to offer lower rates but have stricter qualification requirements, while online lenders provide quicker access to funds at higher costs [13].

Calculating the total loan cost is simple: multiply your monthly payment by the total number of payments. For example, a monthly payment of $1,850 over 10 years would result in a total cost of $222,000 ($1,850 × 12 months × 10 years) [14].

Keep in mind that extending the loan term will lower your monthly payments but increase the total cost of financing [13]. Using equipment loan calculators can help you adjust variables like the purchase price, down payment, loan term, and APR to find the best fit for your financial situation [13].

Understanding these cost dynamics is crucial for managing the impact of changing interest rates on your business.

Managing Rising or Falling Interest Rates

Having a clear plan in place allows businesses to navigate the challenges of changing interest rates effectively. Whether rates are climbing or dropping, a well-thought-out strategy can help you manage equipment financing costs while staying competitive in your industry.

Securing Fixed Rates During Low-Rate Periods

When interest rates dip, it’s a great time to lock in favorable financing terms. Fixed-rate financing provides stability by ensuring consistent monthly payments, no matter how the economic landscape shifts.

Timing your equipment purchases is key. If you’re planning to invest in items like HVAC systems, commercial mowers, or cleaning equipment, low-rate periods can be an ideal moment to secure financing. Leasing during these times can be particularly appealing, as it allows you to lock in both the current equipment price and a fixed interest rate [4].

"When businesses purchase new equipment, it often takes years to realize the full benefits of that upfront cost. With equipment financing, business leaders can spread the costs over a period of time and better align the cost with the benefit of the equipment." - Mark Bearden, Senior Vice President at First American Equipment Finance [15]

Take the time to shop around when rates are favorable. Comparing offers from credit unions, banks, and specialized equipment financing companies can help you find the best deal for your business. Even a slight difference in interest rates can save you thousands over the life of a loan [16].

When deciding between leasing and purchasing, think about your long-term goals. Does owning the equipment fit better with your business plans, or would leasing provide the flexibility you need to adapt as your business grows? Also, consider the total cost of ownership, which includes factors like maintenance, depreciation, and tax implications [16]. If fixed-rate options are limited, exploring alternative financing methods may be necessary.

Alternative Financing Options

High or fluctuating interest rates don’t have to derail your plans for new equipment. There are alternative financing strategies that can help you manage costs while keeping your business running smoothly.

Leasing is a popular option during periods of high or unpredictable rates. Unlike variable-rate loans, leases typically offer fixed payments, giving you stability in your monthly budget [17]. This consistency is especially valuable when traditional loan rates are on the rise.

Leasing also reduces upfront costs compared to traditional loans, which often require higher down payments and stricter loan-to-value ratios. For businesses with seasonal cash flow challenges, conserving working capital is essential.

Vendor leasing programs are another option to explore. Many equipment manufacturers partner with financing companies to offer competitive rates and terms. These programs can help you secure financing while managing cash flow effectively [18].

For businesses with less conventional credit profiles, revenue-based financing can provide the flexibility that traditional loans may not [19].

"In an inflationary economy we are now in, future rents for equipment acquired through a lease based on today's price will be paid in inflated dollars." - Robb Stevens [17]

Using Technology for Better Financing Decisions

In addition to financial strategies, technology can play a major role in managing costs and boosting revenue. Leveraging the right tools can help offset higher financing expenses and keep your business on track.

For example, Cohesive AI provides service businesses with a smart way to grow their client base during tough economic times. When financing costs rise due to interest rate hikes, increasing revenue becomes critical. This platform uses data from sources like Google Maps and government filings to identify local leads, then personalizes cold email campaigns to target them effectively.

For businesses in industries like HVAC, landscaping, or janitorial services, this approach can help you maintain necessary equipment upgrades without cutting back on investments. By growing your customer base and revenue, you can counterbalance higher financing costs.

The platform also manages email campaigns from start to finish, eliminating the need for costly lead generation agencies. The money saved can be redirected toward financing equipment, ensuring your business remains competitive even when interest rates are less favorable.

"In a lower interest rate environment, maintaining profitability requires a multifaceted approach. While fee income or non-interest income is a common focus in many institutions, simply increasing fees will not be enough. Each transaction should be carefully evaluated and priced based on the specific asset and the quality of the credit involved." - Donna Yanuzzi, Executive Vice President and Group Head of 1st Equipment Finance [1]

For service businesses, the lesson is clear: when financing costs rise, diversifying revenue streams and expanding your customer base are key to maintaining healthy margins and funding essential equipment investments.

Conclusion: Staying Competitive Through Smart Financing Strategies

Navigating rate changes calls for a clear and adaptable financing plan. Businesses that succeed during periods of fluctuating rates keep a close eye on economic trends and adjust their financial strategies as needed. These smart adjustments help manage costs, even when rates are unpredictable.

A balanced approach is essential. When rates are low, opting for fixed-rate financing can offer stability for future equipment purchases. On the other hand, when rates rise, alternatives like leasing can help preserve cash flow while still securing the tools and resources your business needs.

"Your success in any rate environment comes down to having both a clear strategy and the discipline to execute it." - PNC Insights [20]

Maintaining healthy cash flow is crucial. This can be achieved by reviewing billing cycles, taking advantage of early payment discounts, and negotiating extended terms with suppliers. Additionally, diversifying revenue streams - such as adding new services or adopting subscription-based models - can soften the blow of rising financing costs.

Technology also plays a vital role in staying competitive. Tools like Cohesive AI can help service-based businesses expand their reach efficiently, generating revenue to offset higher costs.

"By focusing on what you can control - operational efficiency, strategic pricing, and smart capital allocation. You're building fundamentals that help your business thrive in any environment." - PNC Insights [20]

Thriving businesses view rate volatility as an opportunity rather than a setback. Whether it’s restructuring debt, exploring alternative financing options, or leveraging technology for growth, decisive action is what separates companies that flourish from those that merely get by.

"With proactive strategies, companies can adapt and even turn this challenge into an opportunity." - Scott Crawford [2]

Interest rates are cyclical, so it’s wise to implement strategies that strengthen customer relationships and optimize your financing mix. These actions lay the groundwork for long-term success, allowing businesses to take full advantage of low-rate periods and minimize the impact of rate increases. By staying proactive, businesses can build resilience and thrive in any financial environment.

FAQs

What’s the difference between fixed-rate and variable-rate financing for equipment purchases, especially when interest rates are changing?

Fixed-rate financing offers the comfort of consistency by locking in your interest rate and monthly payments. This means your costs stay steady, even if market interest rates climb. It’s a great option for anyone who values predictable expenses and wants to plan their budget without surprises over the life of the loan.

On the flip side, variable-rate financing often starts with lower interest rates, which can mean savings if rates hold steady or drop. But there’s a catch - if rates increase, your payments could rise, making it tougher to manage your finances over time.

Deciding between these two comes down to your appetite for risk and your outlook on interest rate trends. Fixed rates are perfect for those who want stability, while variable rates might appeal if you’re comfortable with some uncertainty and believe rates will remain low or decrease.

How can businesses manage cash flow effectively when rising interest rates increase equipment financing costs?

To navigate cash flow challenges during times of rising interest rates, businesses can take deliberate steps to lessen the strain of increased financing costs. One smart move is choosing fixed-rate loans or leases, which provide a consistent interest rate. This stability ensures predictable payments, shielding businesses from potential rate hikes.

Another practical approach is leasing equipment instead of buying it outright. Leasing spreads out payments over time, easing the immediate financial load and helping preserve cash flow. By thoughtfully considering these strategies, businesses can better maintain liquidity and stay adaptable in shifting financial landscapes.

How can using technology like generative AI help businesses manage higher equipment financing costs when interest rates rise?

Leveraging generative AI offers businesses a practical way to manage rising equipment financing costs by making operations more efficient and cutting expenses. With AI, repetitive tasks can be automated, workflows refined, and data analyzed to support smarter decision-making - ultimately leading to noticeable cost reductions. Take predictive maintenance, for instance. By using AI to anticipate equipment issues, companies can reduce downtime and sidestep costly repairs, saving money over time.

For local service businesses like janitorial, landscaping, or HVAC companies, AI-driven tools can be a game-changer. These tools improve operational efficiency and help allocate resources more effectively, making it easier to absorb the financial pressure of higher interest rates. This not only keeps businesses competitive but also strengthens their ability to weather financial challenges.

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