When buying vehicles or machinery, the dealership will often offer finance for the machine. This can be a convenient option and the headline interest rates are often competitive, and in many cases heavily subsidised. However, how dealer-based funding is structured means there are a few catches that you may not be aware of.

While the dealer creates the loan, this debt is usually underwritten by a bank or other financial institution, and repayments are usually paid directly – if unknowingly – to the finance company.

To enable them to offer a lower than market interest rate to buyers, the dealer will pay part of the interest of the loan to the financier as a subsidy. This will be taken off the dealer margin when the machine is financed. Alternatively, in many circumstances, individual buyers can negotiate that discount from the retail price of the machine as a “cash buyer”.

Difficulties in dealer-based funding can arise when you want to renegotiate during the life of the loan but have no relationship with the lender. While the finance has been provided under the dealer’s brand, the actual financier is largely anonymous, other than in the fine print. This can make it tricky to negotiate with the lender for the likes of term extensions, partial releases of security, or other structural changes to the loan.

Also, typically, dealer-based funding requires a deposit and is often based on short repayment timeframes. The loans are structured this way to reduce the subsidy the dealer needs to pay the financier, but this can create cash flow pressure for the borrower. This finance is not cheap if you’re carrying the consequences of fast repayments on your overdraft.

If your current borrowing situation is not working for you or if you need finance to buy new gear, talk to your business partner at Finance New Zealand to find a solution that suits you and your business best.