Feb 05, 2019

Interest rate bait – buyers get hooked

Interest rate bait – buyers get hooked

Centrepoint Finance consultant Tim Matchett.

Column by Tim Matchett

So many businesses get caught on the interest rate bait thrown out by equipment dealers in their efforts to move new gear.

Unfortunately, the zero and 1.5 per cent interest rates that are cast around are generally achieved by inflating the sale price of new equipment to make up the difference between the “Bait Rate” and the “Real Rate” which means in some cases, you could end up paying more.

When pricing up a job for tender, a contractor typically takes into consideration the costs associated with performing the work which includes finance repayments, employment costs, fuel and materials.

If you purchase a $250k machine for the job with a finance rate of 1.5
per cent you could be forgiven for thinking you’re ahead of the game because the interest rate is so low.

However, if you’ve paid too much for the equipment to get the “Bait Rate” the story may be very different.

Before you buy, its wise to ask your dealer for their best price on a cash purchase because only then can you really compare the actual costs associated with ownership.

In some cases, the dealer may have inflated the retail value by as much as 10-12 per cent to achieve the “Bait Rate” meaning that there are real savings to be had by shopping smart. On other occasions the manufacturer may have thrown some marketing money at the solution to achieve the same result.

Armed with this information, you can source your own finance with confidence knowing that you have the best price on the equipment and access to “Real Rate” finance products which could better suit your needs particularly if you need to payout the loan ahead of time.

Interest rates available to borrowers vary significantly depending on individual circumstances and which lenders are used so it pays to get some independent advice on what is available to suit your needs.

On the flip side, is buying a new machine for six months of guaranteed work really the best thing for your business?

If a well-maintained used machine for $100k is suitable for the work you perform you can price jobs more competitively as well as achieve significant upsides in your businesses profit margins.

It also important to consider that if for some reason you had to sell the $250k machine after 18 months, the likelihood of the finance payout being less than the market value is minimal, especially if financed with a balloon.

If you had to sell the $100k machine after 18 months, the chances the equipment will have a market value greater than the payout is high.

Sometimes buying new is required but it pays to look at the full picture, especially when margins are so tight and the machine repayments, which make up around 30 per cent of expenses are, in many cases, the major culprit when it comes to margin compression and diminishing net profit.

Tim Matchett is a senior consultant at Centrepoint Finance who provides equipment finance broking services to businesses. Tim has access to a wide variety of lenders and provides independent advice to borrowers.

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