Pros and Cons of Vendor Financing for Equipment Lease/Financing
By Dian Kohoutek, CPPA
June 7, 2023
When it comes to leasing or financing equipment, many businesses are presented with the option of vendor financing. While this can seem like an attractive choice, it is crucial to carefully examine the terms and explore alternative financing options before making a decision. Here, we discuss the pros and cons of vendor financing for equipment lease/financing and highlight key considerations for businesses.
Pro
Competitive Deals on New Equipment
Vendors often collaborate with manufacturers’ finance divisions, enabling them to offer compelling discounts on new equipment. These exclusive deals may include lower interest rates or even cash-back options. If you are looking to acquire new equipment, vendor financing through the manufacturer’s finance company can provide significant cost savings.
Convenience and Efficiency
One of the main advantages of vendor financing is the convenience it offers. By opting for financing through the vendor, you can streamline the process of acquiring equipment. Rather than dealing with multiple parties, you can complete the purchase and financing arrangements in one place. For busy entrepreneurs, this can save valuable time and simplify the overall transaction.
Lower Upfront Costs and Equipment Upgrades
When leasing equipment through a vendor, the upfront costs are typically lower compared to those required by traditional banks. While you may need to pay an initial amount, such as a first and last monthly payment, it is generally more affordable than a substantial down payment demanded by banks. Additionally, if you anticipate frequent equipment upgrades or the need for updated technology, leasing can be advantageous. At the end of the lease term, vendors often offer the option to upgrade the equipment, allowing businesses to stay up-to-date without the hassle of selling and repurchasing.
Cons
Limited Availability for Specialized Equipment
Vendor financing options may not be readily available for unique or specialized equipment. In such cases, you would need to seek financing from third-party companies, which often charge higher interest rates and may finance a lower percentage of the purchase price. Banks with industry expertise can be a better choice in these situations, especially if they are familiar with your business and the specific equipment requirements.
Higher Costs for Used Equipment
Financing used equipment through vendors can be costlier compared to financing new equipment. Vendors typically offer higher interest rates and finance a lower percentage of the purchase price for used equipment. In contrast, bank equipment loans are often more competitive and provide better terms for used equipment financing.
Limitations on Loan Terms
Vendor financing companies may not provide certain loan terms that can significantly impact your cash flow management. For instance, banks may finance up to 125% of the equipment price to cover expenses like transportation, installation, and employee training. They may also offer the option to postpone principal payments for a specific period after the equipment purchase, giving businesses time to generate revenue. When considering vendor financing, it is essential to evaluate the available terms and determine if they align with your specific requirements.
In conclusion, choosing between vendor financing and other financing options requires careful evaluation of the pros and cons. While vendor financing can offer attractive deals on new equipment, convenience, and lower upfront costs, it may have limitations for specialized equipment, higher costs for used equipment, and less flexible loan terms. Businesses should conduct thorough due diligence, shop around for financing options, and consider factors like equipment type, financing terms, and their long-term financial goals. By understanding the nuances of equipment lease/financing, businesses can make informed decisions that align with their financial needs and objectives.