Bank Loans vs. Equipment Financing: What the Rate Hides

The Fine Print

The Four Conditions in a Bank’s Loan Agreement

A bank’s equipment loan comes with arrangements that cut the bank’s risk and put it on the borrower. They are in the loan agreement, and they are standard:

A blanket lien: A security interest in everything the business owns and everything it acquires later, far beyond the equipment being financed. From that day on, selling a truck you have owned for a decade, pledging a machine to another lender, or financing a new machine on its own collateral needs the bank’s consent. The blanket lien guide covers how it works and where it bites.
A compensating balance: A requirement to keep an account at the bank with a minimum balance, sometimes a large fraction of the loan, for as long as the loan is outstanding. Money you must leave on deposit is money you have borrowed from yourself, at the bank’s rate.
Annual requalification: The right to review your financials each year and, if a quarter was slow, to call the loan or change its terms, even with a perfect payment record.
Negative covenants: A bar on new debt, new liens or major changes without the bank’s consent. Combined with the blanket lien, it means the next loan tends to come from the same bank, on the bank’s terms and timetable.

Each condition cuts the bank’s risk. Each one also keeps the customer in place, which is how a bank builds repeat business: by making it hard to go anywhere else.

Side by Side

What Comes With the Money

A typical bank equipment loan compared with equipment financing from Crest Capital
Condition	Typical bank equipment loan	Equipment financing from Crest Capital
Collateral	Blanket lien on all business assets, present and future	The equipment being financed only
Compensating balance	Commonly required	Not required
Annual requalification	Commonly required; the loan can be called	Not required; make the payments and the agreement runs to its end
Borrowing elsewhere	Needs the bank’s consent	Your decision; each agreement stands on its own equipment
Rate	Fixed or variable	Fixed for the full term; the payment never changes
Paperwork	Financial statements and tax returns, often several years of each	One simple application; no financial statements or tax returns up to $250,000
Decision	A committee, often weeks	Within four hours, in most cases
Soft costs	Varies	Tax, delivery and installation can be financed; up to 25% of the loan amount
Amount	Varies; small loans are often not worth the bank’s administration cost	$10,000 to $500,000 on one application; larger by arrangement

The bank column describes the terms that commonly appear in bank loan agreements; read your own agreement for the ones that apply to you. The Crest Capital column is from our published equipment financing FAQs and process.

The Trade

What the Conditions Cost

Whatever the two quotes say, the conditions decide what the money costs over the term. A bank will say its conditions are what let it lend on the terms it offers, and that is true. The question for the owner is whether a lien on the whole company and a lender’s say in what you do next are worth it. For a business that expects to grow, borrow again, or sell equipment it no longer needs, they rarely are. The equipment lender’s agreement secures only the equipment, asks for no deposit, does not requalify you, and will finance the next machine next year without a consent letter.

Why small loans get a cold shoulder at the bank

A bank’s cost to underwrite a loan is much the same whether the loan is large or small, so the return on a small equipment loan is thin and the bank often sets a minimum below which it would rather not lend. A closely held company with no published financials is also harder for a bank to assess from a distance. Equipment lenders built their process for exactly that customer: a short application, a credit model that reads the business and its owners together, and a decision in hours. That is why most small and mid-sized businesses now finance equipment with a specialist, often online, rather than at the branch.

When Borrowing Makes Sense

Debt That Pays for Itself

Not all debt is the same. Debt taken on for things that do not produce revenue, such as discretionary inventory or non-essential spending, weighs on a business in a slow year. Debt that buys a productive asset works the other way: a machine that cuts a cost, adds capacity or opens a market can earn more each month than its payment costs, and the business comes out ahead from the first month. The test is simple. If the equipment will save or earn more than the payment, financing it is a return, not a burden. If it will not, the rate does not matter either.

Timing favors the prepared. A slow economy is when the gap between businesses opens: the company that upgrades its core machinery while competitors freeze spending comes out of the slow period stronger. Financing that preserves cash, carries a fixed payment and leaves the rest of the business unencumbered is what makes that possible.

Flexibility

Three Things Businesses Now Insist On When They Borrow

A fixed rate. A payment that is known for the whole term can be planned around, and it cannot rise with the market. Every Crest Capital loan and lease carries a fixed rate for the full term.
No liens beyond the equipment. Assets that stay unencumbered stay available: to sell, to pledge, to finance the next purchase, or to carry the business through a bad quarter.
Speed, and a second source. A lender that answers in hours and finances the replacement machine the week it fails is worth more than any difference between two quotes when the machine that pays the bills stops.

Common Questions About Bank Loans and Equipment Financing

The quotes alone cannot answer that. A bank loan usually comes with a blanket lien, a compensating balance, annual requalification and a bar on other borrowing, and what those conditions cost a growing business over the term is part of the price. Compare the agreements, not only the rates.

A minimum balance the borrower must keep on deposit at the lending bank for the life of the loan. It lowers the bank’s risk and raises the effective cost of the loan, because part of the money borrowed must sit in the bank’s own account.

No. Crest Capital’s fixed-rate loans and leases require no blanket lien and no compensating bank balance, and you do not have to requalify for the loan annually.

Often, with the bank’s cooperation. If the bank holds a blanket lien, the equipment lender will ask it to release or subordinate its claim on the new equipment, and the loan covenants usually require the bank’s consent to new debt. Ask for both in writing before ordering the equipment.

The cost of underwriting a loan is much the same at any size, so a small loan returns little to the bank, and a closely held company without published financials is hard to assess from a branch. Equipment lenders built a short application and a fast credit decision for exactly that customer.

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