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Your next finance/lease Contract: What to consider?
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Most owner operators spend a lot of time researching the type and specifications of the truck that they are going to buy. It is very important to get the right truck for the job. Sadly, few owner operators spend as much time researching their financing and leasing obligations to get the best deal. This is just as important and can save you a lot of money in the long run.
Following is a checklist of items to review and consider before signing your next finance/lease contract (keep this checklist on hand for future reference):
Get Detailed finance quotes (in writing): Call around to various equipment finance companies to get quotes. Shopping for a good rate can sometimes save you a full point on your interest rate. You may even be able to get the finance companies to bid against each other to get your business. As an example, a 1-point difference in the finance rate on a $100,000 loan (from 10% to 9%) over 60 months is $2,931.60. On average, to earn that much money on the road, in after tax dollars, you would have to drive approximately 8,000 more miles!
Take these quotes to your accountant and have them evaluated. This way you can get an objective analysis of what the best deal is for you. Lowest interest rate and/or lowest monthly payment are not always the best deal. The best deal is the one that costs you the least amount over the term while meeting your needs with respect to payment, term, pay out, trade cycle, etc.
If anyone is apprehensive about quoting on the interest rate, even on leases, you should be suspicious.
Look for Unnecessary Admin/Processing Fees: Look on the bill of sale, invoice or finance/lease contract for additional fees that have been added. These will probably be called administrative fees, processing fees, miscellaneous fees, filing fees, etc. When you are potentially spending over $100,000 on a truck, you have every right to negotiate to reduce or eliminate these fees or simply go to another dealer and/or finance company.
Length of the Term and Fair Market Value:
By setting the right term length you ensure that you do not end up "upside down" with your truck value when it comes time to trade. When the fair market value (FMV) or selling price is less than what you owe on the truck you are "upside-down". By choosing shorter amortization periods and smaller residuals, you reduce the probability that you will end up in this situation. Of course, it is impossible to predict the used truck market but the faster you pay off your truck the less likely it is that you will end up "upside-down". The reason most owner operators extend the term further than they should is to reduce their monthly payments and make their cash flow better in the short term. However, building equity in your truck now will make your future truck purchases less painful.
Credit Life/Credit Disability Insurance: Many owner operators pay far too much for credit life and credit disability insurance on their finance contracts. If you don’t get competing quotes for this type of insurance then you may end up paying thousands more than you should. Most of these insurance premiums are rolled into your financing and are prepaid to the insurance company; therefore, you are paying additional interest on this insurance. In many cases, you would be better off buying a monthly pay type of insurance. Remember, shop around!
Gst/Hst: If you are registered, you must charge GST/HST when you trade or sell your equipment. This GST/HST then needs to be remitted to the government. Be certain that all applicable taxes are spelled out in your finance/lease or bill of sale documents. As the tax payer, be certain as to how these taxes are paid and remitted and/or accounted for.
Monthly Payment: It is easy for a salesperson to lower your monthly payment by raising the residual at the end of the term or extending the length of the finance contract. A low monthly payment is not necessarily the only factor to consider; especially if you do not pay down the loan fast enough to keep up with the "real world" value of the equipment. First, shop to get the best truck price (quotes in writing), then shop to get the best financing (interest rate, terms, monthly payment, etc.). If you are leasing, remember to include all applicable taxes in your payment calculations. The idea is to get the best truck and the best financing for your needs.
Sales Pressure: Don’t sign anything unless you understand it and are comfortable with it! There is no reason to rush; there are many dealerships with many trucks available for purchase and many finance sources. If you feel you are being pressured then walk away. The best thing to do is have your accountant look at the deal and help answer your questions.
Get a Copy of Everything: Remember; always take a copy of everything you sign or initial for your own records.
Finance Contract Clauses To Review
Early Pay out Penalties: Finance/Leasing companies and banks often handle early pay outs differently. Sometimes there is no penalty at all - the pay out is simply the principal amount outstanding. An example of this would be an open loan or line of credit at the bank. As a penalty, many equipment finance companies charge 5% of the principal amount outstanding but will forgive this penalty if you refinance with them on your next truck. The worst case scenario is that you have to pay the balance of all outstanding payments. In effect, you are paying all the remaining interest on the loan up front. This is actually quite common on early lease pay outs. So read the fine print!!
Late Payment Penalties: Some finance/lease contracts allow you a grace period after your payment is due to make up that payment without penalty (usually 5 to 15 days). After this period, a penalty amount of about 5% is added to the amount outstanding and a higher rate of interest (18% or so) is usually applied to the overdue amount. Some lending institutions have more forgiving terms than others, so it is important to compare.
Insurance Requirements: Truck insurance requirements vary depending on the lender. Most require a $5000 maximum deductible and a minimum $1 million liability coverage. If you do not have the right coverage then you need to talk with your carrier or insurance agent.
Subleasing: Read the contract you sign very carefully. Many finance/lease documents do not allow for subleasing.
Option to Purchase: If you lease your truck, there will likely be an option to purchase at the end of the term of the lease. While you may think you can simply walk away from your lease at the end of the term, you may be surprised to find out that you could be on the hook for additional costs. Many truck lease purchase options are guaranteed. This means that if you walk away from a lease with a purchase option of $25,000 and the finance company sells the truck for $20,000 then you are responsible for the $5,000 difference.
Personal Guarantees: If you are a sole proprietor then signing a purchase or lease agreement is, in fact, a personal guarantee that you will pay back the loan or meet the lease requirements. If you are incorporated, you will likely have to sign a personal guarantee for the corporation. There are two main types of guarantees – continuing and specific. A specific guarantee applies to the specific piece of equipment you are purchasing. The continuing guarantee applies to the current equipment you are financing in addition to all future equipment purchases/leases made with that finance company. In most cases, with the continuing and specific guarantees, the equipment is the collateral for the loan.
Banks will often use a different kind of guarantee called a general security agreement. Under this type of agreement, the bank holds much of your personal property as collateral against the financing in addition to the equipment.
One other type that is sometimes used is a cross-collateral guarantee. This means that if you have multiple loans/leases with one finance company all of your equipment is used as collateral against the other loans/leases.
In summary, you need to be prepared. Plan ahead and take your time. The faster you rush into a deal, the more likely it is that you will pay more than you should. You can always use a second opinion from your accountant to review the financial details and make sure the deal is fair and meets your specific requirements.
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