24 Jul 2017
July 24, 2017

Seduced by Rate

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Everyone wants a good deal; when it comes to finances, this is particularly true. When we part with our money we want to make sure we are getting a good value and not paying excessive fees or costs which we were not aware of. Surprises are the last thing anyone wants when closing a transaction.

If you approach equipment leasing with a similar attitude, I can guarantee you are not alone. Some of your past experiences may have even led you to believe that the questionable or irritating things you’ve seen are “simply the way it is.” This may or may not be a fair assessment of the equipment leasing industry, depending on what you’ve experienced and the lenders you have worked with. We have heard frustrating stories about lenders across the board including large chain banks and traditional credit unions.

The leasing business has certain jargon specific to the industry like most industries which can be on eof the stumbling blocks for business borrowers. As leasing professionals, we try to stay away from using these terms directly with clients because it adds confusion to the process and if you are confused then you may not be comfortable with the transaction. We try to explain all the terms and keep things as clear as possible since many times the jargon is imbedded in finance documents and we want to make sure you are aware of what is required and expected.

The most common marketing or sales strategy we see used is quoting a very low rate to lure a client into interaction. It seems some lenders will quote a low rate knowing full well that the type of equipment, dollar amount or initial client profile will never realize such a rate. For instance, if a business which has been established for 1 year wants to finance $20K worth of computer equipment the transaction already has 3 strikes against it getting the lower prime rates; short time in business, small dollar amount requested and soft collateral with little resale value. Compare that to an 8 year old manufacturing company wanting to finance a $300K machine tool which has sales of $7M per year then you can see the obvious difference of who will get the lower preferred rates.

Since rate quotes are often requested, we try to offer realistic payments and rate based on what we know; time in business, type of equipment and a general idea of what the business and or personal credit looks like. That way a client has a realistic idea of how much they will pay if approved and often times surprised when we can offer a lower rate than quoted. Of course, quoting realistic rates may make us lose some potential customers who are shopping around but we always try to let them know there are no hidden fees, large deposits, processing costs, etc. so at least they are aware of some of these potential costs which actually drive up that super low quoted rate.

Here are a few costs to be aware of:

1) Unrealistic low quoted payment (fine print will state “on approved credit”)
2) Documentation fees ($200 – $1,000 or a percentage of the equipment cost)
3) Origination fee or Sales fee (1% of total equipment cost)
4) Down payment or Lease deposit (noted as first/last payment due up front)
5) Evergreen clause (auto renewal or extension of a lease payment at end of term unless specific notification is not provided by lessee)
6) Fair Market Value Language that is unclear or ambiguous

Most of these fees are standard in the industry and some can be negotiated. If you’re quoted a super low rate the first thing to ask is “what are all the upfront fees?” If you’re asked for a good faith deposit, which is not uncommon for a complex credit review, then you should request for the refund policy in writing. Make sure if the lender cannot approved you that you get at least 90% of your money back but if you change your mind or find a better deal elsewhere, be prepared to forfeit that deposit.