Factor Financing = Hyper Retail
Financing a highway tractor when there are thousands of pieces of idle equipment should provide some pretty sweet deals. But sometimes, if an operator isn’t looking, they can get shafted. Here’s an example.
An operator agreed to purchase a 2005 truck for $49,000, he traded in his 2001 for $11,000 and submitted an additional $5000 cash. The dealership arranged a “financing” company to purchase and lease out the truck. The terms, however, were $1,519.79 for 36 months with a $100 buyout. That’s total payments of $54,712.44 on a truck that the financing company shelled out only $33,000.
Because the residual value (buy out) was only $100.00, Canada Revenue Agency demands that the “lease” be capitalized (depreciated). Unfortunately this requirement differs from what leasing companies imply at the time of signing. Too many still say every payment can be written off. The arguments rage on between CRA and leasing companies but operators still end up reporting their taxes the way they have to. There may be hidden reasons why leasing companies argue so strongly.
Operators must calculate deemed “interest” on their deemed “purchase”. In this example the transaction triggered a 36.4% interest rate. Combine this rate with the fact that, if the truck was written off in the first few months, the ENTIRE $54,712.44 would be due immediately. Since insurance wouldn’t payout more than $49,000 the operator could loose yet another $6,000 in cash. How does the leasing company justify this rate of interest? Simple, they don’t call it interest. It’s called factoring. They purchase a truck for a guaranteed buyer (arranged by the dealer) and “re-sell” it for a higher amount. This type of financing is not typical financing its FACTOR-FINANCING. Someone, other than the dealership, has agreed to re-sell the truck at a much higher price. It’s retail on retail, or hyper retail.
If you are an operator who is presented with factor financing, I suggest you re-evaluate your business model. It is often times much better to invest $16,000 rebuilding an engine than to throw it away to a factor financing scheme. If you are in doubt about your deal, refuse leasing! As I demonstrated in my book, the advantages almost always lean towards owning anyway. Any benefits of leasing would only be temporary (at best) but may hide disadvantages that can drown any operator, no matter how careful.
If you are considering upgrading your equipment remember to ask your mechanic not your accountant. Very few accountants will ever know the mechanical strength of your truck, which is the primary reason for upgrading equipment. With all the trucks and deals available on the market today most operators should be able to build value. However, a hasty decision in a down trodden market may drive some operators to the poor house.