Different customers have different equipment needs. The same is true for equipment financing. While bank financing may make the best sense for one firm, it doesn't mean that it makes the best sense for every company.
Bank financing has become more difficult to secure. In the wake of the subprime mortgage crisis and the ensuing firestorm of new regulations from the US Federal Government, there have been an unprecedented number of bank closings over the past couple of years. (Click to see the FDIC's Failed Bank List.)
Many of the banks that are still in the lending business are either looking for risk free deals, preparing for more oversight by the Federal government, or trying to clean up tainted portfolios.
The good news about getting approved for bank financing is that, if your business is fortunate enough to qualify, you should expect to receive fairly aggressive rates.
The unfortunate news is that "rate" doesn't always tell the whole story. When you begin to dig deeper and consider the overall costs of bank financing, rates aren't always what they seem. A "low rate" from the bank doesn't always translate into the best decision for your business.
When you take into account the true cost of bank finance, there are several factors you should consider. When considering whether to lease finance or bank finance, the decision should never be based on rate alone. It's important to understand the implications and true costs of each alternative. The aim of this article is to get you thinking about what that 6.5%, 5.5%, or 4.5% loan from your bank is really costing you. (Click here for a list of what you should consider when dealing with a leasing company.)
Have you ever heard it said that "banks only want to lend you money when you don't need it?" When your firm enters into a bank financing agreement the bank will more often than not stipulate that (1) your firm must put a significant chunk of equity into the deal, (2) your firm must keep its deposits and cash accounts at the bank, and (3) in the event of default, your bank has a right of "set off" which means they can tap into your cash account(s) to make a payment on the loan in any event of default.
Pay close attention to the documentation as banks prefer to cross collateralize all assets including the cash you have on deposit.
The result is that your true rate of interest is a lot higher than the face rate your bank quoted. To add insult to injury, because you've borrowed from the bank to fund the equipment purchase; you've reduced your operating line borrowing capabilities.
In real numbers, a 5-year loan for a $100,000 piece of equipment at a quoted 4.5% interest could really be a loan of $60,000 at 17% interest (assuming you have an average monthly balance of $20,000 cash in your business checking account and the bank required you to put another 20% down on the equipment purchase).
Don't get caught making an equipment financing decision without knowing the facts.
VFG has been in the equipment finance business since 1991. We have quite a few Fortune 500 customers as well as smaller, privately held clients. Are you considering whether it makes better business sense to borrow from the bank as opposed to financing or leasing with an independent like VFG?
At no cost to you, we'd be happy to take a look at what the bank is offering in order to demonstrate to you where we might be able to provide extra value. Please don't hesitate to ask.