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LOWER RATE BUT HIGHER PAYMENT – HUH?

The following is a true story.

Several years ago a potential customer approached us to do an equipment lease for slightly under $50,000 of equipment. The business was pretty well-established and provided video editing for movie and TV production companies in Southern California. The only problem was that the owner had recently divorced and (1) no longer owned a home and (2) had some slow payments as a result of the somewhat messy end to his marriage.

We evaluated the credit and submitted a formal request to one of our lenders and ended up approving and funding the lease at a pretty competitive rate especially given his recent personal credit hiccups.

A year later the customer came back to us for another lease and we again approved his credit and funded his request and were able to do so at a slightly lower rate than before.

The next year our customer called and told us he was once again getting some new equipment for slightly under $60,000 and would like us to quote. Apparently he had spoken to another broker or leasing company and they had offered a very attractive rate. We updated our credit information and found that his credit had actually slipped a bit. The D&B report showed some recent delinquency and a a small suit. Despite this we felt we could approve the request because the customer’s payment history with us was excellent. We quoted a lease based on what we felt was a reasonable cost of funds and a reasonable margin for a repeat customer. It turned out the all-in rate to the customer was approximately 9.0%.

Over the next few days it seemed like the customer fell off the face of the earth. No return emails and no return calls. A week or so later our salesperson finally made contact and was told by the customer that he had decided to go with another leasing broker because they had quoted him a rate of 6.5% and our rate was about 9.0%. We know our market and although we certainly do not ‘win’ every single opportunity we do win far more than our fair share and we know our competition and approximately what they can do and what they can’t. The broker this customer was working with was far less capable than we were and we knew without any doubt they could not approve this customer at 6.5%. We sent the customer an internal form we share with customers to use when comparing competing lease or
finance quotes.

A week or so later we contacted the customer and sure enough he used our form to compare our numbers with the competition. He discovered that we were requiring a monthly payment of $2,725.00 and the competition was requiring a payment of $2,815.00. That was a difference of $90.00 per month or $5,400.00 over the term of the lease. Obviously our proposal was better so we prepared a set of documents and emailed them to our customer fully expecting that we had won the deal.

A week after that we hadn’t received the signed documents so our salesperson called the customer to find out if there was a problem. To our jaw dropping astonishment this customer advised that he decided to go with the other company and when we asked him why, has answer was……. “You guys had a better payment but the other company had a better rate”.

We removed this contact from our database and decided it was probably best if we not compete on future opportunities.

We offer this informational document as our opinion based on over 40 years of experience in the commercial finance industry and suggest that you to use it as a part of your decision making process. As with all important decisions, especially financial decisions, we also suggest that you consider all aspects carefully and consult with your attorney or accountant or other party who is knowledgeable about financial matters when considering entering into a legally binding agreement.

About Charter Capital

Charter Capital is a family owned and operated commercial finance broker. Since 1977 we have been providing businesses just like yours with equipment and technology leases and loans that are right for their specific financing needs. Nothing we do is standard.