Is 0% Financing Right For Your Business And Its Customers?
By Mark Grimes, @DF_LLC
Zero percent (0%) financing offers originated in the automobile industry but have long since spread to other industries due to their effectiveness in attracting customer interest. Properly utilized and managed, these programs can be valuable promotional tools, helping you close more deals in a competitive business environment. However, like any financing program, it’s important to know all the facts before offering a 0% financing option to your customers.
A product or service purchased with a 0% financing plan allows your customers to avoid paying interest for a predetermined period of time. As a result, cash-strapped customers can get a jump on working away at the full purchase price of your products or services since their regular monthly payments go directly toward the principle.
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Offering 0% financing is a great incentive that may help you stimulate quick sales volume during periods of reduced activity. These offers are also an excellent way of closing difficult deals, enticing “on the fence” customers to buy and clearing out excess or aging inventory.
Of course, as with any funding arrangement, 0% financing comes with some fine print caveats. While an attractive offer like “No Money Down” or “0% Financing For The First 12 Months” may draw potential customers to your door, the fact is that these no-interest opportunities are, more often than not, limited to buyers with excellent credit scores who have never missed a payment on past loans. Unfortunately, in many cases, those aren’t the buyers most attracted by the offer. Depending on the policies of your leasing partner, customers who don’t qualify for the 0% offer may be eligible for an extended payment structure or a slightly higher interest rate of perhaps 4-5%.
But before we delve too deeply into the benefits to your customer, let’s take a closer look at how 0% financing offers work from a vendor perspective. One potential drawback is that most 0% financing programs require vendors to provide a blind discount or down payment requirement. Depending on the credit term and funding amount, your leasing partner will pay between 86% and 92% of the final invoice and request a typical no-interest repayment period of between 24 and 36 months.
Here’s an example of a theoretical 0% financing program breakdown based on a $50,000 purchase price:
- 24 months = $2,083 per month to customer
- Lease company pays you 88% or (50,000 * .88) for a total of $44,000
- 36 months = $1,389 per month to customer
- Lease company pays you 86% or (50,000 * .86) for a total of $43,000
Of course, despite this blind discount or down payment requirement there are a significant number of advantages as well. In addition to helping you overcome the interest rate objections of potential customers, one of the biggest vendor benefits of a 0% financing program is the ability to control the sales opportunity. Since 0% financing allows you to offer an on-the-spot purchasing solution, you are better prepared to keep your customers from looking elsewhere for a better deal.
What’s more, 0% financing allows you to avoid the hassle of dealing with each individual customer’s bank, keeping your sale from getting caught up in the red tape of their financial institutions’ funding policies.
For more helpful advice and guidance on creating the equipment financing program that’s right for you and your customers, click here to contact Dimension Funding or call 800.755.0585 to speak with a member of our Business Finance Funder (BFF) team.