One of the most confusing secrets of equipment purchasing is equipment financing. Unlike mortgages or other tightly regulated industries, medical devices have fewer restrictions on how the loan is setup, which means there are more options available to you! And it is more difficult to compare those options; since virtually everyone offers equipment financing.
Have you ever had the experience where you walk into a Car Dealer and they’ll tell you about promotional monthly payment, but they are apprehensive to share the interest rate? Or watch their attitude turn 180 degrees when inform them you have your own financing solution? These scenarios are common in the Medical Equipment Industry as well. Many of the dealers and manufacturers in the industry often look to make the ‘extra’ profits through financing.
So, then what should you do? How do you recognize and choose the ‘Reasonable Financing’? Does such a thing even exist?
Here are the three most important factors to determine what you’re getting:
Interest Rate / APR, Early Payment Term, & Buyout Term
Interest Rate / APR – People believe this is easy since we see it all the time on TV and we know how interest rate works, right? Not so fast! Did you know that interest rates and APR can be different? You can be given an interest rate of 5% but end up paying much higher APR? It’s a common misconception that APR is about the same as the interest rate, but it cannot be further from the truth. Once, I saw a special equipment financing advertised at a low interest rate, but APR was around 15%. And yes, this is legal.
What to do: The only way to determine you’re getting what you’re told is by using a mortgage / auto loan calculator from a credit union or a major bank. (A bunch of websites offer this for free) Plug in your purchase amount, length of the loan and interest rate. If the monthly payment from the calculator is the same (or close enough) with what you were quoted, you now know what interest rate or APR you’re truly getting. If payment is significantly higher than what the calculator says, it’s time to ask what’s your true APR.
Early Payment Term – I have seen many customers who regret not asking about Early Payment Term. This is because with a mortgage, we are taught to pay extra each month to pay off early and there’s rarely any penalty associated with it. It’s a rude awakening when you come to realize it’s not the same with your equipment loan. Many people plan on paying off their loan early to save money on interest if the equipment financed for business starts to bring in enough revenue. Unfortunately, many financing companies will NOT let you pay off early, or there’s a heavy fine to do so where you’ll essentially end up paying interest for the full term even if you are able to pay off early.
What to do: Ask about an Early Payment Term. Don’t settle with a simple answer ‘you can pay off early’. Ask specifically, ‘can I pay off the principal only early without paying the remaining interest?’ If the answer is yes after a certain period, then ask to put that in writing on your equipment financing contract. Typically, an acceptable term for this is (in my experience) anywhere from 2 years to half term.
Buyout Term – People often assume after 60, 72, or 84 monthly payments, you own the equipment. Due to how business tax write offs work, especially with section 179, the majority of the equipment financing is actually leasing. And the most popular option is $1 buyout, which is essentially the same as financing since you only pay $1 as final payment at the end of the term and you own the equipment. But the keyword here is ‘option’. Your buyout term can be all over the place from $100, $5,000 or even 50% of the purchase price! Sometimes, a 2nd loan starts as part of the buyout process, no joke.
What to do: Ask about the Buyout Term. Accept $1 buyout or something you can easily pay at the end of the term. Make sure it’s in writing within the financing contract.
Are you scared to finance equipment yet? I’ve got more! I’ve seen financing companies with terms where interest rates go up if you miss a payment or two. I’ve seen a contract where if you try to pay off early, you have to pay more than what you have paid in a full term, and I’ve seen super low monthly prices with buyout terms that’s essentially purchase price. So, is there an easier way?
If you’re not willing to negotiate and watch out for all these terms on your equipment financing contract, your best bet is to work with a bank. And no, not your typical bank you have your checking account with, they may have a process for equipment but it’s often too slow, taking months approving a small loan. You want to work with bank direct programs that are regulated by the bank. There are few banks out there that specialize in these types of loans. And because they are bank regulated, they can’t play too much with APR, they usually offer 50% Early Payment Term or sooner, and typically offer 10% or less on a buyout. (I’m not referring to regulation, but based on personal experience)
However, if you ask any financing company if they are bank direct, they would usually say yes. Even though if they’re a financing company / broker because they are technically working directly with a bank. So, it’s difficult to know… But here’s 2 things that might help.
Approval Time – If you’re working with a bank directly, they have direct access to their approval / underwriter, which means they can get your credit approval decision within a few hours, much faster than a broker can go through their approval process.
Rate – Many banks (not all) often offers you flat rate / APR for everyone instead of giving you a range of rates based on your credit. Only bank can afford take these types of risk by bundling enough clients to create one flat advertised rate you get as long as they can approve you.
However, I’m in no way saying you should only work with banks as many financing companies & broker that do things right and upfront. Just like there are banks that often push their limit to be as profitable as possible. In fact, financing companies can often offer more flexibility especially in complicated financing situation. More importantly, if you have less than perfect credit, many banks won’t even consider your financing. It’s all relative and you must compare them objectively and decide what works for you.
The best way is to work with a partner who understands ins and outs of financing and can help you to make sure you get the deal you’re promised, the way you expected.