Pros and cons of vendor financing for equipment purchases
If you’re in the market for a piece of equipment, chances are you’re going to be offered financing by a vendor.
It may be tempting to simply sign a lease at a dealership, but you might be better off getting a business loan from a bank, depending on your needs and the type of equipment you’re buying.
There are many factors to consider when financing equipment purchases, and it can often pay to shop around, says Kirk Irving, BDC Business Centre Manager in Kitchener, Ontario.
“Many entrepreneurs don’t even look at the options,” Irving says. “But, by taking a little bit of time, you can do your due diligence and see what’s out there.”
Irving offers these pros and cons of vendor financing for equipment purchases.
3 pros of getting vendor financing for an equipment purchase
Great deals on new equipment
Many manufacturers have their own financing divisions that offer discounts to stimulate sales at dealerships. The result is often hard-to-beat deals on new equipment, including ones where you’re offered the option of taking a lower interest rate or getting cash back.
“The deals on new equipment are generally very compelling when you’re dealing with the manufacturer’s finance company,” says Irving, whose team lends to entrepreneurs making equipment purchases.
For many busy entrepreneurs, the ease of lining up financing while buying the equipment is a major plus. Banks are getting much faster at approving loans, but they still have to assess the value of the equipment and your credit worthiness.
“The dealership is a one-stop shop,” Irving says. “The sales rep says: “You want to buy this piece of equipment? Great. Let’s just go over to this other office, and we’ll arrange the financing.’”
Lower upfront costs and ease of upgrading your equipment
When leasing equipment from a vendor, you will probably have to pay some money upfront, such as a first and last monthly payment, but it will typically be less than what a bank would require for a down payment.
As well, it often makes sense to lease equipment that has a short lifespan or needs to be updated frequently, such as computer hardware. This is because at the end of the lease, the vendor will simply lease you upgraded equipment under a new lease agreement. If you own the equipment, you have to sell it and buy a new one to get an upgrade.
3 cons of getting vendor financing for an equipment purchase
Unavailability for many kinds of equipment
Manufacturers of unique or specialized equipment often don’t have inhouse financing companies. That means you have to go to a third-party financing company to get a lease or a loan. They may charge higher rates and finance a lower percentage of the purchase price.
“If they don’t understand what the aftermarket value of that equipment looks like,” Irving says. “They see it as a lot riskier.”
Here, you might do better dealing with a bank, especially if your banker is familiar with your business and experienced lending to a wide variety of industries.
Higher costs for used equipment
The cost of financing a used piece of equipment through a vendor can be much higher than what it costs for a new one. In part, this is because the dealer doesn’t benefit from manufacturer incentives on used equipment.
Vendor finance companies will typically charge higher interest rates and finance a lower percentage of the cost of used equipment, Irving says. This makes bank equipment loans much more competitive.
Less attractive terms
Vendor financing companies don’t offer certain loan terms that can make a huge difference in managing your company’s cash flow.
For example, some banks will finance up to 125% of the price of equipment to cover such costs as transportation, installation and employee training.
They may also postpone principal payments for a period after you buy your equipment. This becomes important if you need time to get your equipment up and running, and employees trained on it, before it starts generating revenue for your business.
“You have to look at what you want from the transaction,” Irving says. “Not everything is a price conversation.”