There are a number of different finance structures to consider when investing in new technology, including chattel mortgage, bank loan, and rental plans. The most common plan at the moment is known as the rent-to-buy plan, but it is essential that you understand the terms, as well as the key issues before investing.
Balloon fees
The most overlooked aspect of rent-to-buy plans is whether there are any balloon fees outstanding at the end of a plan. These are fees that, once the plan has expired, are required to be paid in order for you to own the asset. For example, if you were to buy a new laser priced at $100,000, you may be offered to finance it at $528 per week on a 4 year plan, leading you to think that you are paying $110,000 for the full system. Many providers however, will charge a balloon fee at the end that can cost as much as $30,000 on a system like this, making the investment far more expensive than it initially seemed.
The most important thing to avoid is paying a “market rate” balloon fee at the end of your rent-to-buy period. The reason for this is that when it comes to these systems, who is to say what the actual market rate is? You are essentially signing up to pay an unknown figure at the end of your loan period. In our experience, they never charge lower than the expectation, and will always ask for far more because the number is open-ended. For this reason, we only recommend financiers who provide either no balloon, or a fixed amount at the end of the loan so all of the terms are known quantities.
Another common trick to avoid in regards to balloons, is that often financiers will make a deal to remove the balloon fee at the end of the loan IF you purchase another system to renew the contract. The problem with this then, is that you are perpetually paying interest for the rest of your business life. It is far better for you to be earning a return on investment on your money, than to be continually paying interest to someone else.
Interest rate
Another interesting aspect designed to confuse is that there is technically no interest rate with rent-to-buy plans because they are not a depreciating loan. Instead, what they have are fees and charges that make them difficult to compare with other plans, making it difficult ensure you are getting the best deal possible.
Often it is the case that when comparing two rent-to-buy plans, one seems cheaper at the outset. But once you include all of the additional fees and any balloon fees at the termination of the loan, the result becomes wildly different. Furthermore, if you were to ask your supplier, “What is the interest rate?”, this can be interpreted in two different ways in order to lower the figure quoted that is well within the supplier’s legal right.
Take the example of a $100,000 purchase which could be described in the following two ways: “The interest is 10% per year” as opposed to “There is a 10% per annum interest rate”. On a 4 year loan, at the interest rate of 10% per year, we could be paying back $140,000 in total. However if it were 10% per annum on a depreciating loan, the amount of interest decreases as we pay back the money. Therefore on a 10% per annum interest rate loan on $100,000, we would instead be paying back $133,420 over 4 years, resulting in a saving of $6,580 difference to your businesses profits.
This strategy is used so that in the instance that you obtain a 9% interest rate per annum loan from the bank, financiers will be able to say to you, “well we provide ours at 8% per year”, appearing to be cheaper but sadly not being the case.
Ultimately, there is far more complexity to financing outside of what has been written here, such as the different tax deduction benefits of going through rent-to-buy as opposed to chattel mortgage or other structures.
If you are considering purchasing a system and would like guidance on finding the best deal for you, our team can help. Please reach out to us using our live chat and we will be in touch shortly.
