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Are you considering an equipment financing agreement? Here are a few key points to consider.
The Lender
It is important for you to choose a quality equipment financing partner. Remember, equipment financing agreements are long-term (3-5 year) financial relationships. Attractive initial terms are quickly forgotten when long-term relationship issues arise. If you are unfamiliar with a particular lender, ask for several references. It is also important to determine who will be collecting payments. Many financing companies act as a broker and lose all control of your agreement. If you are working with a broker, you may not have access to a decision maker in the event future needs or issues arise.
Get It In Writing
You cannot properly evaluate an equipment financing proposal if all the terms and conditions are not communicated in writing. If a financing company does not initially provide a written proposal, ask them for one. Failure to get a written proposal may result in unknown or hidden financing costs and fees.
Know the Up-Front Cost
A written proposal should outline all initial costs. Advanced rentals, down payment, security deposits, and documentation fees are all common costs at signing. Avoid the mistake of accepting what appears to be a low rate-rate offer without properly accounting for increased up-front costs.
Know the Term Cost
The monthly payment and length of term should be outlined in an equipment financing proposal. A lower payment for a longer period of time may cost more but may enhance your cash flow. The opposite is true for a short term agreement. It may cost less but put increased demands on your cash flow.
Know your End-of-Term Costs
End-of-term obligations can quickly raise the overall cost of what appears to be a low-rate at lease signing. A properly written proposal should clearly define your end-of-term obligations. Common end-of-term purchase options include $1, $101, 10% option, 10% put and Fair Market Value (FMV). Beware of proposals, written or verbal, that promise one thing but indicate something different on the agreement. Avoid ambiguous purchase options such as 10%/FMV. Get a commitment as to whether it is 10% or FMV.
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