By: GreatAmerica on April 8th, 2021
Implications of a Low Rate on a Lease or Other Finance Agreement
Why Other Factors May be More Important Long Term
When evaluating the right finance provider and program for your company, one factor that comes into play is the rate. It is no secret that the price of financing varies among providers. And when you have a team that is incentivized by money, sometimes companies or individuals seek out the lowest rates available. In this blog, we want to provide insight into some of the unintended implications when you base your decision solely on who offers the lowest rate.
What are the side effects associated with a low rate?
When shopping around solely based on price, there are several factors to be mindful of for you, your company, and your customer.
First, acknowledge that finance companies generally don’t give away money. Offering a low rate upfront indicates that the finance provider expects to make a return on their investment in other ways. This article shares some ways finance companies make up for low rates.
We've worked with solution providers to implement finance programs and help them win deals and if a lease rate feels too good to be true, it might just be. We've learned there are four major drawbacks of a low-rate decision to you and your clients, including:
- Hidden Fees
- Unclear End-of-Term Expectations
- Compromised Service Levels
- Less Accessibility and Longevity
Surprise fees are not a great relationship or trust builder which is why it is important to review the agreement for fees. Any fee the provider plans to levy during the term of the agreement should be stated there. Be sure to exercise diligence when sifting through the terms so you have clear expectations going into the business relationship. Below are a few of the standard fees your customer could see associated with their finance agreement, though it is important to note fees vary from finance provider to finance provider. Educating yourself and your customer on these fees will ensure there are no unanticipated costs.
As with all fees associated with a finance agreement, you’ll want to consider the impact to the total cost to finance. While an origination fee is pretty standard in the financing space. We’ve seen anything from $89.50 all the way up to $250. This fee is not material on its own, but when combined with other unexpected fees, an origination fee will increase the overall cost.
Be on the lookout for fees associated with invoicing. We have heard of companies charging the end user customer for a physical copy of their invoice. Although buyer behavior is shifting toward digital, some clients still prefer a paper invoice. After all the work that goes into winning a client’s business, the last thing you want is to provide a poor buyer experience.
Property Tax Administrative Fees
Depending on the lease type, the finance company will file and pay property taxes for the leased equipment. Many times, the finance provider will ask the customer to reimburse them for the property taxes paid. One way leasing companies make up for the cost of a low rate is by charging an administrative fee for the burden of filing, paying, and billing the customer for the property tax. That fee can be charged every year and can add up to several hundred dollars.
As with most bills, finance agreements are subject to late fees, check-by-phone fees, and/or returned check fees. With these fees, you’ll want to keep an eye on whether they are reasonable, since they can range quite a bit. For example, we’ve seen late fees range from 1.5% - 15% of the amount due.
Unclear End-of-Term Expectations
Look for a section within the terms and conditions of the finance agreement around how the End of Term (EOT) will be handled. Here are a few things to watch out for:
This practice that can vary from company to company. Typically contained in the EOT section, if the end user fails to notify the finance provider within a certain window, the agreement with automatically renew for an additional 12-month period. Your customer may be frustrated if they miss the notification deadline and furious if they are stuck in their old agreement for an additional year. Because this term may range from a friendly month-to-month cadence all the way to the one-year lock, it is critical to be aware of the expectation at the forefront.
Notice of Termination
To add to this challenge, some in the industry will have different windows within which you can notify the finance company. For example, “You must notify us between 90 and 180 days before the end of your agreement.” Sadly, this is something most of your customers aren’t even thinking about until they get within 90 days of the end of their agreement, so be diligent in understanding and setting this expectation proactively. When this happens, your client may have to make payments that weren’t factored in when calculating the total cost of the finance agreement.
The purchase option at the end of the agreement is another area to look out for when vetting a financing partner relative to rate and total cost of ownership. Do they have a capped purchase option they can share with your customer? This is how we’ve seen many finance companies reduce their lease rate with implications to you or your client at the end of the lease. If this isn’t laid out in the lease document, be sure to ask the finance provider.
Compromised Service Levels
When working in tandem with a finance provider, this often means both you and the finance provider have interactions with the end-user customer. We highly recommend having confidence in your finance provider’s ability to handle customer requests in a timely, friendly, and mutually beneficial manner. Some questions to ask include:
- How do you or your end-user customer get questions answered and issues resolved?
- Will you or your client have a dedicated team member to speak to when questions or concerns arise?
- What does the turn time look like for credit applications?
- Does it take hours or days to review an opportunity? What about for document preparation?
If the answers to any of these questions isn’t favorable, the finance company may not be investing enough into infrastructure to ensure that your company and your customers have a great experience. It does no good to get a low rate, only to lose a customer due to poor service levels.
Additional Factors for Selecting a Finance Provider
There are many factors outside of price that can help align your go-to-market strategy and long-term goals with the finance provider. The following are a few questions you should ask before committing to a finance provider:
- Does your potential finance provider offer lease expectations in writing to avoid unwanted surprises for you and your customer?
- Does your potential finance provider offer innovative products and programs to demonstrate their commitment to your long-term success?
- Are your values, including customer experience standards, and branding in alignment?
Above all, when evaluating the right program for your company and your customer, simply take the time to evaluate your options. It’s not a “one size fits all” scenario – it is your responsibility to select the provider and program that best suits your long-term goals, which we hope is to retain profitable clients for life.
About GreatAmerica Financial Services Corporation GreatAmerica is the largest independent, family-owned national commercial equipment finance company in the U.S. and is dedicated to helping manufacturers, vendors, and dealers be more successful and keep their customers for a lifetime. A $2.5+ Billion company with life-to-date finance originations of over $14 Billion, GreatAmerica was established in Cedar Rapids, Iowa in 1992 and has a staff of over 600 employees with offices in Iowa, Georgia, Minnesota, and Illinois. In addition to financing, GreatAmerica offers innovative non-financial services to help our customers grow.