Sometimes, your business needs to acquire equipment that you know will make money in the long run, but short-term cash flow issues make it tough to pay the costs. In these situations, you may decide to finance the equipment and pay it off on a monthly basis, which will prevent cash flow problems, build your business’ credit, and potentially offer tax benefits. Perhaps you start looking at financing options and find a great-looking deal that offers zero annual percentage rate (APR) and zero down payment. Seems like an easy win, right?
Maybe not. There’s nothing inherently wrong with zero APR and zero down financing deals, but many people equate them to “zero cost” financing, which isn’t true. Financing always comes with a cost, but zero APR and zero down solutions are better at hiding it — which isn’t always a good thing.
What Are Zero Down and Zero APR
When you go to buy equipment, you might see a deal from a captive finance company, which is a company that provides financing directly through the equipment seller. For instance, if you buy Honda equipment, you’ll go through Honda Financial Services. If you purchase from Caterpillar, you could finance through Cat Financial.
To get people to use the in-house captive financial company instead of a bank or an independent financing partner, the captive finance company may offer a special promotion: either zero down, zero APR, or both.
- Zero down means you don’t have to make an immediate down payment on the equipment.
- Zero APR means the annual percentage rate (APR) of interest for the financing is zero for a period of time. During that period, you won’t pay any interest on the amount you’ve borrowed.
The Hidden Costs of Zero Down and Zero APR
On the face of it, zero down and zero APR seem great: you don’t have to pay any money up front, and with no interest for a set period of time, you can pay more toward the principal. However, remember that there are no free lunches in financing. Companies that provide financing have to make money to stay in business, and the way they do that is by charging fees and interest.
Captive financing companies are no different. But because these companies work directly with the equipment manufacturers, they can set purchase prices and otherwise adjust the terms of the transaction so they can make money without charging interest at first. Often, the result is that you feel like you’re paying less for financing, but you really aren’t.
Some of the ways captive finance companies adjust zero down and zero APR deals to make money include:
- Strict requirements: When you don’t provide any down payment and you pay no interest at first, the financing company takes on more risk. To offset this risk, the financing company may require a very high credit score to qualify for the deal. In some cases, the company may not tell you that you don’t qualify for the zero down/zero APR deal until near the deal is almost done, at which point you feel committed.
- High interest rates after introductory period: Often, the overall interest paid on zero APR deals is the same as for other types of financing. The financing company simply charges a much higher interest rate after the zero-APR period ends to make up the difference.
- Higher equipment costs: The financing company may work with the equipment manufacturer to “bake in” the cost of financing into the price of the equipment. You never see these hidden costs, and you end up paying for the financing without even knowing it.
Finding Financing That Works for Your Business
Keep in mind, we aren’t trying to say that zero down/zero APR deals are always bad options or that the companies who offer them are doing anything wrong. Zero down and zero APR are just marketing strategies that companies use to sell financing, and like most marketing, you need to take it with a grain of salt.
Instead of going right for the zero down and zero APR deals you see advertised, do a bit of extra homework and evaluate all your financing options. Take as much time as you need to read the fine print on a deal. As always, make sure your business credit score stays strong by paying your bills on time, not borrowing more than you can pay back, and not taking out too many credit lines at once.
In the end, you may find you can get better financing terms and pay less overall than you would if you took a zero APR deal. At Team Financial Group, we always explain the full cost of financing up front, and we’ll work with you to customize a financing option and terms that make the most sense for your business. We’re dedicated to helping our clients grow and thrive by providing efficient and flexible financing options and personalized service.
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The content provided here is for informational purposes only. For financial advice, please contact our commercial financing experts.