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.

RELATED: Understanding Interest: Variable Vs. Fixed Interest Rates for Equipment Financing

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:

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.

Team Financial Group Offers A Variety of Equipment Financing Options to Fit Your Needs

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The content provided here is for informational purposes only. For financial advice, please contact our commercial financing experts.

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