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Trying to make sense of financing offer

bisdreamz

Plastic
Joined
Nov 4, 2018
So, we are on the edge of purchasing a VF2ss - but at the last minute I am not too confident in the lender we are working with so far. Our rep has been very helpful for awhile, but the numbers arent adding up for me.

The offer in their terms:
$74,995 financed
61 months
10% down payment ($7,495)
$1,436.71 per month
Reported 7.85% rate
They want a security deposit equal to a month of pay, and a payment up front - seems odd for financing to me.

These numbers are stated as without sales tax.
My understanding is we are financing 68k, given our deposit, and at 7.85% for 60 months should be $1,335/mo.

They initially structured it as a lease, which also was not clear to me.
Lease offer
Financing 70,877
60 months
Purchase option "FMV 10%"
$1,436.86 per month

This seems wrong to me, because the payments are equal to financing 100% of the machine instead of ~90 - not less the residual. So it seems they want to finance the full amount and still seek 10% for buyout. No reference to a documented residual or projected FMV. When I tried addressing this for clarification with our guy he did not seem to understand my point, gave no explanation for how they arrived at the numbers, and chalked it up to 'thats how equipment leasing works'. All of my reading says otherwise.

My partner and I are applying for financing under a new LLC, but we are filing jointly and co-borrowing with our existing company which has 3 years of >$1MM/year revenue. We keep six figures in the bank at all times, can demonstrate comparable credit, and have decent to good personal credit.

Can someone familiar with the equipment finance world explain if I am misunderstanding and the financing is a decent offer, or if we are being screwed? I may talk to Haas about financing but was told they take about 2 weeks which is why we initially avoided it. The lender our HFO referred us to wants 25% down!

Posting here to gather feedback before the weekday begins.

Thank you
 
They initially structured it as a lease, which also was not clear to me.
Lease offer
Financing 70,877
60 months
Purchase option "FMV 10%"
$1,436.86 per month

This seems wrong to me, because the payments are equal to financing 100% of the machine instead of ~90 - not less the residual. So it seems they want to finance the full amount and still seek 10% for buyout. No reference to a documented residual or projected FMV. When I tried addressing this for clarification with our guy he did not seem to understand my point, gave no explanation for how they arrived at the numbers, and chalked it up to 'thats how equipment leasing works'.
I only leased one machine once but that was pretty much how it worked. They aren't financing it, they are buying it and renting to you. The payments can be whatever they want that you are willing to pay :)

In California that was a really bad deal for another reason - small shops may not list all their equipment as personal property but the lease company does. And in California the personal property tax is paid on the initial price of the equipment, not the depreciated price. So you get stuck for the max tax every year even tho the real value has dropped dropped dropped. On a $10,000 piece no biggy. On $150,000 it's a ripoff. By the end of the lease I think I was paying a 10% tax on that thing annually.

Leasing sucks.
 
Same tactics as a car dealer. Add 1-4% to the APR of the bank they are borrowing from, then finance the entire balance to you. Then they take off the down payment and pocket it leaving you stuck with higher monthly payments and an overall more expensive purchase due to the interest. Given your financial situation, why are you even dealing with the vendor financing? You should have a business line of credit at a bank somewhere at less interest than you can get at a MTB.
 
Can someone familiar with the equipment finance world explain if I am misunderstanding and the financing is a decent offer, or if we are being screwed?

This is a time value of money question - learning how to do an IRR (Internal rate of return) calculation in excel is the best way to deal with these. Basically you want to know what the effective lease rate is between two scenarios. For your second scenario, assuming they want a month up front, I get an 8.59% IRR, and for the first scenario I get an 10.85% IRR.

The down payment is a bit of a red herring but it does lower their risk, mathematically you're right, its same as if you pay the vendor the 10% and they advanced the balance, i.e they are financing 67,500.

When you look at different finance scenarios, and how the leasing companies in effect trick people, is that your cost isn't the interest rate, its the interest rate, plus the deposit, plus the fees etc....all in the context of time value of money. The security payment is worth a lot more to get today, than to get 60 months from now. For example, in our first scenario, making payment 60 in period one adds 400 basis points to the return, if there's say an $800 admin fee, that adds another 560 bips, etc.

Now, look at the buyout. How to handle that? Just plug a number into the cash flow at the last period, If it was $5000 say, that would add another 1.5% to their return.

Any complexity of cash flow can be distilled down to its effective rate or IRR this way. I've attached a simple version of an excel sheet. If you are trying to get the exact number someone else does, subtleties like beginning or end of month come into play as does the compounding period (i.e I'm taking annual interest /12 which is annual compounding)

If you keep 6 figures in the bank, why are you looking to finance?
.

The answer to that is to lower the weighted average cost of capital, but it implies 1) the cash in the bank will serve some other purpose (even if its to deal with volatility), and 2) the business properly values the equity it uses, i.e. the shareholders gets and expects a reasonable return on equity (which should always a higher number than a lenders interest rate). That's the theory, it works in bigger businesses, in smaller businesses less so as there is more risk
 

Attachments

  • Mcgyvers simple IRR example.zip
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I have leased with dollar buy out several machines

first and last, and you need to have insurance or they add.

interestingly it was dollars per 100k very similar to your example, so while they are lying about the interest rate, it is probably a standard enough deal.

2k/100k with no down payment[other than first and last]

Actually I might be wrong, there might be another half months payment in fees or something, it has been a while.


I used Stearns out of Minnesota, they were never cheap, but they did not screw around and knew their business. Only person I ever dealt with that understood my tax return.

As a mental cheat for short loans [5 years and under] figure all the interest for half the time and you come pretty close to your monthly payment

for 75k financed, that works for their numbers. 75 financed means 75k financed on an 82500 machine. A 68k loan is 68k financed, not 75
 
I don't know how it works in OK, but in OR they added the personal property tax to the lease payment on a mill I bought that way. The machine was reported as leased equipment on my personal property taxes- I didn't start paying on it until the lease was ended.

The deposit and first month up front are paid back at the end, mine was paid off 2 months before I was expecting.

Looks like a standard lease arrangement to me.
 
I don't know how it works in OK, but in OR they added the personal property tax to the lease payment on a mill I bought that way. The machine was reported as leased equipment on my personal property taxes- I didn't start paying on it until the lease was ended.
Probably depends on the leasing company. Mine was separate and a surprise. They paid it, then gave me a bill for $1900. An unexpected bill. Ouch.

An ouch that turned into a yearly ritual, at the same amount, no matter the depreciated value of the machine.
 
Property tax on machines, what the eh?.. bad enough to pay it on land/buildings, glad they don't ding us yet for what's inside them here yet but don't give them any ideas....


As to those interests rates and terms, that doesn't look good to me.
Some dealers here were offering 3-6month no payment and better interest rates/financing plans than that when I was shopping earlier this year(though they likely make it up elsewhere) still did my own thing though, didn't want any monthly payments or to pay anyone else those types of interests.
 
gbent - We are looking to finance as 75+k is still a significant amount of liquid cash, which may at times be used to float invoices and what have you.

I got clarification back and the offer is an 'EFA', basically a lease still. Not the loan I requested!
Have called CNCA and actually started the app process with them. They have already been very nice, its a soft pull for application, plus theyre running a 1.9% to 3.9% rate special beginning tomorrow. Holy cow! Hopefully we will be approved through them as that is fantastic. It seems like now is about as cheap as ever to buy a Haas machine for anyone currently in the market.

So that solves the mystery.
 
Property tax on machines, what the eh?.. bad enough to pay it on land/buildings, glad they don't ding us yet for what's inside them here yet but don't give them any ideas..
Not just machines- everything used in the business. Office equipment, software, hand tools, the paper in the copy machine.

Everything. If it's part of the business, it's supposed to be on the personal property tax return. You can bundle some things- hand tools, office supplies don't have to be itemized. Every piece of equipment is listed on it's own, and you have to notify the State when you add or remove anything.
 
We used US Bank. They were the best I found for a fast and a good loan. Of course things could have changed over the years, but they were catering to machine shops and small businesses a short time back.
 
Talk to Haas. Granted this was 4+ years ago, but we leased our machines from them with a $1 buyout and no money down. It may be worth your time.
 
We used US Bank. They were the best I found for a fast and a good loan. Of course things could have changed over the years, but they were catering to machine shops and small businesses a short time back.

They are still the same way. I did a loan with them and they were great to work with.
 
webform is actually not a very convenient app for calculations, I use regular Excel and haven't noticed any problems in using it. When I created my company on a microloan, I used Excel and my clients quickly adapted to it. The only problem I have is signing contracts with the agency of debt collectors. I've found many companies that are really willing to kill a person for a loan, but I refused to work with them because of their lack of humanity. My competitors signed contracts with thugs who would burn down a house or kidnap a person for$ 1,000. Be careful when you take out a loan, as well as carefully read the contract, it describes all the terms of the loan.
 
Plus one for US Bank, leased a machine through them, no real issues. I also negotiated with them to have the option to buyout at the current principal owed after 18 months, so it was more like a loan at that point. You are most likely going to have to lease the machine if you don't have a bank that you have worked with before because lenders prefer leases. Also, that interest rate is terrible especially at this point in time.
 
I don't recall the lender but Selway tried to set us up with one that wanted to put a lean on the entire shop, so read the small print well with the lender you choose, I think we were treated well by Haas financing on 9 machines ofer about 10 years.The one we bought 2 years ago we bought outright and I think it was the most complicated one yet, that may have been because everything is getting more complicated to buy these days.
 
Just bought our 3rd haas, and all financing was done via CNCA. They have been fantastic with great rates. No payments for the first 6 months right now also.
 








 
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