How to Protect Your Business from Equipment Financing Scams
Financing equipment sometimes involves questionable tactics. Obtaining nearly any kind of financing can indeed be difficult. Furthermore, some of the terminologies can be tricky, at best.
However, most larger industries are regulated, including the mortgage and insurance sectors. Therefore, when someone disobeys the law, they are punished. Nevertheless, the businesses of financing and leasing equipment are much less controlled. Because of this, companies are more vulnerable to scams when financing equipment than in some other situations.
Therefore, going with a larger financing corporation like Charter Capital is often the safer route. They are less likely to scam you than someone who sends you a postcard offering a free dinner.
Some of the biggest corporations in the field of equipment finance, but not all, are the worst offenders when it comes to deceit, unscrupulous business practices, and outright stealing from their clients. These tactics are subtle and difficult to spot unless you know what you are looking for.
Here are the top five frauds to be on the lookout for:
1. The Evergreen Clause
This is one of the most dangerous things an equipment leasing firm can include in your contract. Suppose you are leasing equipment for a 48-month term with a $1 buyout. This means that after 48 months, you can pay one dollar and own the equipment.
However, an Evergreen Clause states that the lease contract is automatically renewed at the end of the original term unless written notice is given within a specified time. This time is usually 90 days before the expiry date. Failing that notice, the contract is automatically renewed for another term.
So, instead of owning the equipment, the renter has additional payments. This, of course, can only happen if they are unaware of the full conditions of the contract and the Evergreen Clause that was hiding in the fine print. Unfortunately, 45 states permit these evergreen clauses in contracts.
2. Advanced Fee Traps
Before approving you for finance, some equipment leasing businesses ask for a sizable deposit that may cost thousands of dollars. However, if you do not receive the financing, they keep the money, arguing that they put a lot of work into the transaction and should be given something in return.
Legitimate businesses may ask for a prepay document fee to ensure the credit department isn’t wasting their time. This may amount to a couple of hundred dollars. However, honest businesses never keep this money if the financing fails to come through.
3. Bait & Switch, Part 1 – Faking Cheap Rates
Suppose you search for “construction equipment financing.” Have you seen a commercial that offers “rates as low as 5%”? The website then requests that you complete a form to receive your quote. Working with a company like this is never a good idea.
First of all, the 5% rate is definitely false. Few people are eligible for a rate like that. It typically applies to businesses with excellent credit, a long operation history, and enormous revenues that purchase new equipment from a dealer who frequently offers zero percent financing.
Second, that 5% rate is not the same as the rate on your mortgage, which is typically referred to as the APR. Lease rates don’t amortize like loans do. Therefore, equipment finance agreements are often quoted in payments rather than rates and practically never include a “rate.” As it is not amortized like a loan, “simple interest” rather than an APR is being quoted to you.
Know the Difference
Here’s how to calculate simple interest if you are quoted $825 as your monthly payment on a $40,000 tractor over a 5-year period.
You will actually be financing $38,350 for 58 months if you fully pay your first and last installments. As a result, you are paying a total of ($825 X 58) = 47,850 over 58 months to borrow $38,350. Your overall finance costs are $47,850 – $38,350 ($9,500), or $164 monthly. This adds up to $1,965 annually in finance payments. That equals around 5.1% simple interest.
But suppose you calculate it like a loan that is amortizing as you, the consumer, imagine the rate is calculated. In that case, you have to use a financial calculator, and when you enter the data, the rate on an APR is actually 9.6% instead of 5.1% – that’s a significant difference!
That is not to imply that you shouldn’t pay rates like that; that would be at the lowest end of the payment range. That is how much equipment financing actually costs. However, you will still want to avoid organizations that try to entice you by claiming their charges are lower than they actually are.
4. Bait and Switch, Part 2 – Equipment Leasing Calculators
An “Equipment Leasing Calculator” can be found on several websites that finance equipment. All of them are pure rubbish.
Why? Because will they produce the best-looking rate, and it’s doubtful that the rate will correspond to what you actually pay.
In reviewing several online leasing calculators, all had similar quotes for the data that was entered. It was estimated that $50,000 for 60 months at a $1 buyout would cost $1,125 or thereabouts per month. That is a true statement for a borrower with “A” credit.
Suppose someone is attempting to estimate how much equipment they can afford using an online calculator. According to the calculation, they go out and shop or bid on equipment that costs about $45,000 because their monthly equipment budget is about $1,000.
However, once they locate their equipment and decide to purchase it (often for a job or contract they have bid on in anticipation of purchasing it), they discover that the payment will be $1,400 based on their credit or other profile information. This means they can afford equipment costing about $32,000 instead of $45,000.
They now have two options: pay the $1,400, which is really more than they can afford, or start looking again, risking losing the excellent contract they are either bidding on or have just won.
Avoid interacting with businesses that have phony equipment leasing calculators on their websites. The figures can be deceptively optimistic and can lead to other poor decisions.
5. Changing the Contract
The first four strategies we discussed were dishonest but lawful. However, some equipment leasing companies have recently offered a $1 purchase option and then sent back the contract with an FMV or 10% option, hoping no one would notice the changes.
Therefore, always verify the contract you receive back to see whether it has been altered. In addition, try to avoid working with a business that has attempted to change the terms of the agreement after you have signed it.