Whenever you are interested in purchasing a piece of machinery, you will most likely be able to acquire financing from the specific dealer of that machinery. However, gaining an understanding of the benefits and drawbacks of purchasing equipment from vendors should be your top priority. This will help you make better decisions.
It is tempting to enter into a lease agreement with the retailer; however, depending on your needs and the type of machinery you intend to buy, the retailer might prefer that you apply for a business loan through a bank instead.
Kirk Irving, manager of the BDC Business Centre in Kitchener, Ontario, notes that there are a number of factors to consider before making an investment in a piece of machinery and that it is frequently to one’s advantage to search around.
Irving claims that a lot of business owners don’t even consider all of their options.
You can perform your research and find out what options are available to you, but this will take some time and effort on your part.
In this segment, Irving discusses the benefits and drawbacks of obtaining financing from vendors in order to purchase equipment.
3 benefits of obtaining finance from the vendor for the purchase of equipment
Take a look at the 3 benefits that can help you obtain finance from the vendors for the reason of purchasing equipment.
1. Incredible savings on brand-new pieces of machine
There are a lot of manufacturers out there, and many of them have financing divisions that offer special deals to encourage customers to buy from dealers.
It is typically difficult to find better deals on new machinery than those offered by retailers. These deals may include the opportunity to pay a lower interest rate or receive cash back.
When working with the manufacturer’s finance company, “the offers on new equipment are generally very captivating,” says Irving and his crew, who provide loans to business owners who are investing in equipment. “The deals on new equipment are generally very compelling when you’re dealing with the manufacturer’s finance company.”
It is of tremendous value to busy business owners to have the option of arranging to finance the purchase of equipment quickly and easily.
Even though banks are getting better about quickly approving loans, they still have to determine not only your creditworthiness but also the value of the equipment you want to borrow money for.
Irving claims that the car dealership is a one-stop shop for all of their needs.
“The sales rep tells me: “You want to buy this piece of equipment?
Let’s go to the office together, and we’ll assist you in making the necessary financial arrangements.'”
3. Reduced costs and the ease of modernizing your machinery
If you plan on renting equipment from a provider, the likelihood is that you will be required to make an initial payment, such as the first and final monthly installment; however, this payment is typically less than what banks require for a down payment.
When negotiating the purchase of new equipment with the finance company affiliated with the manufacturer, you can typically find more favorable terms.
In addition, it is generally a good idea to rent equipment that has an extremely short life span or needs to be upgraded frequently, such as computer hardware. This is because this type of equipment tends to become obsolete very quickly.
This is because when the term of the lease is up, the vendor simply leases the upgraded equipment under the terms of a new agreement to lease it again. This is the reason for this.
In the event that you are the owner of the machine, in order to receive an upgrade, you will be required to get rid of the machine you currently own and then buy a new one.
3 disadvantages of obtaining financing from a vendor for the purchase of equipment
Below are the 3 disadvantages will get from obtaining finance from a vendor for equipment purchase.
1. Inaccessibility of a wide range of different types of equipment
In most cases, the manufacturers of specialized or one-of-a-kind equipment do not have their own in-house financing firms.
Because of this, in order to acquire a loan or a lease, you will need to look for a third-party financing firm to work with.
They might charge higher interest rates in addition to financing a smaller portion of the overall purchase price.
Irving is quoted as saying, “If they don’t understand what the aftermarket value of that equipment looks like.”
They have a much more negative outlook on it.
It is possible that working with banks will be more beneficial for you in this scenario, particularly if the banker you work with is familiar with your business and has previous experience lending to a variety of different industries.
2. Increased costs for the equipment that is actually used
It really is possible that the expenditure of financing an older piece of machinery from a broker will end up being higher than the cost of buying a brand-new piece of machinery.
This is because dealers do not receive manufacturer bonuses for the sale of used machinery.
Irving asserts that vendor financing companies typically charge higher interest rates and finance a smaller portion of the cost of used machinery.
This makes equipment loans from banks a significantly more competitive option in the market.
3. Terms that are less desirable
There are no predetermined loan terms offered by vendor financing companies, which means that your company’s ability to effectively manage its cash flow will not be significantly impacted. Learn everything you can about cash flow loans and how they can help your company.
For instance, some financial institutions are able to offer financing for at least 125 percent of the equipment’s value, which can be used to pay for additional costs such as installation, transportation, or employee training.
They also had the option of delaying the payments for the equipment’s principal for a period of time after it was purchased.
This is essential if you need some time to get your machinery up and running and train your staff on how to use it before it can start bringing in revenue for your business.
“Irving suggests that you should consider what it is that you want to get out of the transaction. Not every topic can be discussed in terms of cost.