Businesses that rely on heavy equipment to carry out their day-to-day operations face some serious costs when it comes to acquiring, upgrading, or replacing their equipment. These large machines can be difficult to finance out of pocket, and even if you can, it may not be the most pragmatic way to do so.
Below, we’ll dive into some of the heavy equipment financing basics and cover what you should know about small business heavy equipment loans and leases.
What Is Heavy Equipment Financing?
Heavy equipment financing includes loans and leases used to acquire specialized vehicles, such as dump trucks, backhoes, and bulldozers, that are used in construction, excavation, or timber projects.
There are several different ways to go about financing heavy equipment, depending on whether you’d prefer to own the heavy equipment or simply operate it for a set period. Each has its advantages and disadvantages.
What Is Heavy Equipment?
While the phrase “heavy equipment” is most often associated with construction projects, it encompasses a wide variety of specialized vehicles controlled by licensed operators. Common examples of heavy equipment include:
Tunnel boring machines
Heavy Equipment Loans VS Leases
The most commons types of heavy equipment financing are loans and leases. At a glance, they share a lot of traits in common: term lengths, interest rates, monthly payments. They do, however, have different rationales and rules governing them.
An equipment loan is a term loan used, as you might guess, to buy equipment. Most equipment loans last between three to seven years, with some lasting as long as 10. In most cases, you’ll be expected to make a down payment of somewhere around 15% of the cost of the equipment. Relative to leases, loans usually have better rates but cover a smaller percentage of the total costs.
An equipment lease is used to buy or rent equipment. Leases themselves fall into two broad categories: capital leases and operating leases.
Capital leases are used to buy equipment and serve many of the same functions as an equipment loan. They don’t typically require a down payment and often cover 100% of the costs, with terms typically ranging from three to five years. Heavy equipment capital leases frequently come in the form of $1 buyout leases or 10% purchase option leases (10% PUT). This means that, at the end of your leasing term, you’ll have the option to buy your equipment for the amount specified: $1 in the case of $1 buyouts, and 10% of the equipment’s cost for a 10% PUT. Why so low? Well, a capital lease assumes you’re going to buy the equipment. In fact, the equipment is considered an asset for tax purposes. Capital leases are appropriate for equipment that doesn’t go obsolete quickly and slowly depreciates.
Operating leases are similar to capital leases but with a few key differences. Operating leases are usually for a shorter period, generally two years or less. At the end of the leasing term, you’ll have the option to purchase the equipment (typically for fair market value, which is why you’ll sometimes see these leases called fair market value leases), return it, or renew your lease. Depending on the exact terms of your lease, it may count as an asset or a business expense.
How Heavy Equipment Loans & Leases Work
Heavy equipment loans and leases both work a little differently. As I described above, both feature monthly installment payments and interest. Where loans have down payments, which are paid at the beginning of the loan, leases have residuals, which are paid at the end of the lease. Both residuals and down payments can vary based upon the type of agreement you sign with your financer. In the case of residuals, they may be optional if you choose to return your equipment or renew your lease.
Note that heavy equipment loans and leases aren’t substantially different than other types of equipment financing. The main difference is that you’re dealing with more specialized and expensive equipment than most other industries. That means you’ll need to work with a funder who is willing and able to extend you both the amount of money you need to acquire the equipment and a suitable amount of time to pay it off if you’re buying it.
Used VS New Equipment
Depending on the type of heavy equipment you’re looking for, you may have the option to finance used equipment as well as new. Used equipment can often fall into the hands of equipment lessors (companies offering leases) when the equipment is returned to them rather than purchased. These companies may simply provide operating leases for businesses who will use the equipment for a short time and then return it.
If you’re looking to buy used heavy equipment from a third party, and you need financing, make sure your financer can work with the reseller in question.
Expected Terms & Fees
Generally speaking, the term length of your heavy equipment loan or lease depends on two factors: whether you’re renting or buying, and how long the useful life of the equipment is. It’s rare for a loan or lease to have a term length that’s longer than the equipment’s expected useful lifespan. In practice, you’re probably looking at somewhere around the five-year mark for most heavy equipment financing.
Interest rates on loans and leases can and do vary widely, depending on your financer and your fitness as a borrower/lessee. Interest rates for heavy equipment usually start in the high single digits, with the ceiling somewhere just short of 30%.
Loans and leases can also come with all manner of supplemental fees, or none at all. If you can help it, you should always try to deal with financers who will charge you the least amount of these fees as possible. A standard fee for a loan is the origination fee. This is an amount deducted from the money you receive from your loan rather than a fee you pay directly. Leases, on the other hand, sometimes have administration fees that are charged to “keep your account active.” These may be annual or month-to-month.
Additionally, you can expect to pay late fees if you fall behind on your payments.
What About Collateral?
So that multiton vehicle you’re financing? It’s worth quite a bit, and your financer will either have a lien on it or own the title to it, depending on the type of financing you receive. The nice thing about equipment financing is that the equipment you’re financing is the collateral. If you default on your loan or lease, the financer can simply repossess the equipment.
That said, if you have particularly bad credit, you may also have to make a larger loan down payment or pay a month of your lease in advance.
How The Application Process Works
With any kind of equipment financing, it’s usually a good idea to have the specific make and model of equipment as well as a vendor/seller in mind before you apply to help expedite the process.
If you’re going through a bank, credit union, or captive lessor, you’ll probably need to apply on-site. Online financers, as you might expect, will generally offer the ability to apply through their websites. Both entities will be looking for the following information:
Time In Business: Has your business been around long enough to be stable?
Personal Credit Score: How much of your credit are you using, and do you have a history of paying it back on time?
Debt-To-Revenue Ratios: Are you likely to have the resources to be able to pay your loan and lease?
Your financer will attempt to ascertain all of the above by asking for corroborating documents. You can save yourself some time and grief by having these documents available when you apply:
Personal identification/driver’s license
Three to six months of bank statements
Tax returns/financial statements
A quote from your equipment vendor
Some financers may ask for additional information.
After you’ve submitted your information, the financer will consider your application and likely do a soft or hard pull on your credit. Equipment financing tends to be on the quicker side as bank financing goes, but with more substantial investments such as heavy equipment, you may be looking at a lead time as long as weeks to a month or two. If you go with an online lender, the process will be much faster — usually measured in days — though you’ll probably end up with a higher rate than you would by going through a bank.
If you’re approved, the financer will usually directly pay the vendor, though, in some less common cases, you may receive the money directly to buy the equipment.
Are You Qualified For Heavy Equipment Financing & Is It Right For Your Business?
Heavy equipment isn’t cheap. Even with generous financing, you’re looking at a significant financial burden. Consider the investment you’re making and to what degree it will directly contribute to your revenue. Does it make more sense to rent or to own?
To qualify for heavy equipment financing, you’ll want to have a credit score of at least 620, preferably higher. Leases, which don’t involve down payments, usually have a higher credit requirement than a comparable loan. That said, don’t assume that you can’t get financing even if your credit is under 620; there may be high-risk lenders willing to work with you…for a price.
Is Heavy Equipment Financing Not Right For You? Your Other Options
Do you still need heavy equipment, but don’t think a heavy equipment loan or lease can get you there? Check our list of top equipment financers to make sure. If you don’t find what you’re looking for there, you still have other options.
Since you’re dealing with expensive items with long utility lifespans, you may want to consider other kinds of long-term loans. In particular, SBA 7(a) and 504 loans can provide the high borrowing amounts and long term lengths you need. Both can be used to purchase equipment.
Looking to finance other types of equipment and landing here accidentally? Maybe you’re looking to finance laundromat equipment or tech equipment?
The post Heavy Equipment Finance Basics: What You Should Know About Small Business Heavy Equipment Loans & Leases appeared first on Merchant Maverick.
Worldpay is one of the largest merchant services providers in the industry and also a direct processor with a worldwide presence. Recent acquisitions have made the company even bigger, with an estimated $1.5 trillion in annual processing volume. Because of Worldpayâs commanding market share, many merchants eagerly sign up for an account with the company, thinking that âbigger is better.â After all, most of us do business with industry-leading companies all the time. We buy our smartphones from Apple, our cars from recognizable brand names such as Toyota or General Motors, and just about everything else from Amazon. Big-name brands can offer better selection, better customer service, and more competitive prices, right?
Well, no. Unfortunately, the merchant services industry doesnât work the same way as the technology, automotive, or retail sectors. Huge direct processors such as Worldpay can be a good deal for a large, well-established business that has the leverage and the negotiating expertise to hammer out a deal thatâs beneficial to both parties. However, small business owners frequently get stuck with the worst possible terms, including tiered pricing plans, long-term contracts with expensive early termination fees (ETFs), and sometimes outrageously overpriced processing equipment leases. Make no mistake — Worldpay and other large processors aggressively market to small businesses. The collective market share is simply too big to ignore. However, as an individual small business owner, you wonât get the kind of favorable terms and competitive prices that a large business can get. Youâll also struggle to get the companyâs customer service department to pay any attention to you.
For these reasons, many small business owners have quickly soured on the idea of having Worldpay as their merchant account provider. Weâve seen dozens of complaints against the company, both on consumer protection sites, such as the BBB, and in the Comments section of our Worldpay review. Unfortunately, closing a merchant account is never a simple process. Providers such as Worldpay go out of their way to make it as difficult as possible in the hopes of discouraging you from terminating your business relationship with them. In this article, weâll discuss why itâs so difficult to get out of a Worldpay merchant account contract and lay out the specific steps that youâll need to follow to do so successfully. Weâll also show you how to find a better provider and give you a few recommendations for you to check out.
The Trouble With Cancelling A Worldpay Merchant Account
In addition to the usual problems with high prices, long-term contracts, and poor customer service, one of the most persistent complaints that merchants have about Worldpay is that it is extraordinarily difficult and frustrating to get out of your contract and close your account once youâve decided to do so. Worldpay — and most other traditional processors, for that matter — seems to go out of its way to make it as difficult and inconvenient as possible to close a merchant account once youâve signed up, regardless of the circumstances. The company is counting on a steady stream of income from your business, and it doesnât want to give it up for any reason.
The following is a brief (and incomplete) list of problems that merchants have had in trying to close their accounts:
Missing Paperwork: The merchant submits a written request to close the account, but Worldpay claims it never received the request. The account remains open — often for many months after the closure request was submitted — and monthly fees continue to be deducted from the merchantâs bank account, even though the account is obviously no longer being used.
Disappearing Equipment: Merchants know that they have to return processing equipment, such as credit card terminals and POS systems, at the end of their contract unless they originally purchased them outright. Somehow, Worldpay frequently âlosesâ returned equipment in transit, giving the company an excuse to charge the full price for the missing equipment. If you leased the equipment, lease payments would continue for the entire length of the original leasing agreement, regardless of when your merchant account was closed.
Inability To Reach Customer Service: Once youâre on Worldpayâs radar as wanting to close your account (often through a voicemail or email requesting help in closing your account), you can be virtually assured that the company will never return your calls or respond to your emails again.
Closing Your Account By Telephone:Â Even if you do manage to reach a real person at customer service, be very wary if they allow you to close your account over the phone. Worldpay requires a written notice, which must be submitted within the required notice period to take effect. If a customer service representative offers to close your account over the phone without that notice, youâll likely find that your account was never really closed, and youâll continue to be charged all of your monthly account fees indefinitely until you figure out that this is happening.
Being Erroneously Charged An Early Termination Fee (ETF):Â Letâs be clear here: If you agreed to an early termination fee (ETF) as part of your contract when you opened your account, and you end up closing your account before the end of your current contract term, you will be charged an ETF as soon as your account is closed. However, if you obtained a written waiver to the ETF when you negotiated your initial contract, or youâre closing your account at the end of the current contract term, you should not be charged an ETF at all.
How To Cancel Your Worldpay Merchant Account In 4 Steps
So how do you properly go about closing your merchant account with Worldpay? Despite what you might think, the company canât legally keep you bound to your contract forever. It has to provide a procedure for terminating your contract and closing your account, and Worldpay has to honor it if you follow this procedure to the letter. Like most providers, instructions for closing your account are contained in your contract documents, usually in very fine print buried somewhere in the middle of the document, where Worldpay is hoping youâll never find them.
Believe it or not, Worldpay is actually a little more transparent than many other providers in this respect. An FAQ on the Worldpay website contains the following instructions:
In order to cancel your account, WorldPay requires that a 30-day written notice be submitted via fax or US mail. On the cancellation notice please verify the purpose of the account cancellation, along with the company name, 5 digit Account ID, signature of the primary contact on record, and an email address to which a confirmation can be sent. Please do not assume your account is cancelled until you receive confirmation via email.
While this information is accurate, it doesnât cover everything you need to consider before closing your account. Youâll want to review your merchant agreement carefully to find the full details of how to close your account. One key takeaway here is that you cannot close your account over the telephone. Worldpay, like most providers, requires that you submit your request in writing. While the company knows full well that this requirement makes it more inconvenient and time-consuming to close your account, having a written record of your request protects you as well. If you find that youâre still getting charged monthly account fees after you thought your account was closed, youâll have a written record of when your request was sent as well as proof that you provided all of the required information.
Weâd also note that the 30-day notice requirement is more or less the industry standard for account closures. Like most financial organizations, processors work on a 30-day billing cycle. You should expect that you might be billed for the month after you submit a request to close your account. However, you should protest any charges beyond that. Weâve seen other providers require a minimum notice of 60 or even 90 days before closing your account, which makes it that much harder to get your notice in before your contract automatically renews for another year. We strongly suggest that you pad the minimum notice period by as much time as you can to minimize any possible delays in mailing your written notice to Worldpay. For example, thereâs no reason why you canât send in the notice 45 days (or even earlier) before the end of your current contract term.
You also need to consider the reasons why youâre closing your account and whether youâre shutting it down at the end of a contract term or in the middle of one. Ideally, youâll want to time your account closure so that it occurs at the end of your contract term. Doing this prevents the contract from automatically renewing and absolves you of any responsibility to pay an early termination fee. However, if youâve decided to close your account before the end of your current contract term, you will probably have to pay the full ETF. If youâre closing your account to switch to a competing provider, thereâs no point in protesting the ETF. However, if youâre closing your business for good (as opposed to selling it or transferring ownership) and no longer need the account, you might be able to convince Worldpay to waive the ETF.
With these considerations out of the way, letâs examine the step-by-step approach youâll need to follow to close your account successfully:
1) Find Your Merchant Agreement
Contract documents relating to your merchant account are critically important, and we recommend that you keep both digital and written copies of all of them. Most contracts usually consist of a Merchant Account Application (which spells out pricing and terms unique to your account) and a Terms and Conditions section (which lays out the boilerplate provisions that apply to all merchants). You might also have separate documents for equipment leases and third-party services (e.g., payment gateways). You should also keep copies of any waivers granted by your sales representative when you initially set up your account.
2) Review Merchant Agreement For Termination & Account Closure Provisions
While the quote above from Worldpayâs FAQ gives a good overview of the account closure process, itâs not legally binding. Youâll want to review the full closure requirements contained in your original contract documents. Worldpay, like most providers, uses a variety of standard contract documents that change over time. Donât assume that a blank contract document you found on the internet is identical to the one that applies to your account.
In addition to identifying specific account closure procedures and requirements, youâll also want to determine your accountâs anniversary date. That is the date when your current contract term expires, and a new term will automatically begin if you havenât initiated the process to close your account. This date can be either the day you signed your contract, the day you first started using your account, or some other date as defined in your contract. Unfortunately, while providers go to great lengths to spell out how your anniversary date is determined in your contract, theyâre not so forthcoming about what date theyâre actually using for your account. A customer service representative should be able to provide this information for you, as your provider uses your anniversary date to determine when your contract automatically renews and when any annual fees are due.
Weâd also note that if you intend to continue in business with a new provider after youâve closed your Worldpay merchant account, the transition will be much smoother if you can have the new account set up and ready for use before your current account closes. That will prevent the unfortunate possibility of being unable to process any credit or debit card transactions while waiting for the new account to activate.
3) Follow Account Closure Provisions To The Letter
Once youâve nailed down your account closure requirements and determined your anniversary date, you need to follow those instructions to the letter. This is not the time to get sloppy. A missing signature, incorrect merchant account number, or any other errors on your part will almost certainly result in your closure request being rejected (or delayed just long enough for the automatic renewal clause to kick in).
We highly recommend that you contact customer service before initiating a closure request, even though theyâre not likely to be very helpful. While Worldpay appears to accept any form of a written request that contains the required information, many other providers will insist that you submit your request on a special form. This form wonât be included as part of your contract and wonât be available from the providerâs website. Instead, youâll have to ask for a copy and hope that the company sends it to you in time.
We also recommend that you print out your account closure request and submit it via Certified Mail. Emails can get lost or âaccidentallyâ deleted all too easily, but using Certified Mail gives you a record of when your letter was mailed as well as when it was received and who signed for it. You might need this information if the company later tries to claim that it never received your request.
Besides a written request, you might also need to return any processing equipment that doesnât belong to you. This mostly applies if you received a âfreeâ terminal as part of your initial merchant account setup. These terminals are provided for your use for as long as you keep your account open, but they remain under Worldpayâs ownership. Youâll need to send any such equipment back to Worldpay as soon as your account is closed to avoid getting charged the full value of the hardware.
Unfortunately, it isnât so easy to get rid of leased equipment. If you made the mistake of leasing your processing hardware, youâre pretty much stuck with both the equipment and the monthly lease payments for the duration of your leasing contract. If youâre switching to a new provider, you might be able to have the equipment reprogrammed to work with their processing system.
4) Monitor Account Statements & Any Additional Charges
Unfortunately, weâve received way too many complaints from merchants whose problems with Worldpay didnât end when they closed their accounts. As weâve discussed above, thereâs a possibility that youâll continue to be charged monthly (and possibly annual) account fees long after you thought your account was closed. The burden is definitely on you to monitor your account statements and your business bank account to catch any of these charges. While itâs normal to be charged fees during the month after your account is closed, anything beyond that should be brought to the companyâs attention immediately.
Worldpay promises to notify you by email when your account is closed, but you shouldnât assume that this is the final word. Any number of hiccups can occur that might prevent your account from actually closing. If this happens to you, your first course of action is to notify Worldpay immediately and provide all documentation related to your account closure request. If the unauthorized charges continue, we highly recommend that you file a complaint against the company with the BBB. Believe it or not, even huge companies such as Worldpay care about their online reputation, and theyâll usually be a lot more helpful in trying to resolve the situation once youâve gone public with your grievances. As a last result, if none of the above actions have worked, you may have to close your business bank account to stop the automatic withdrawals. We realize that this is a tremendous inconvenience, but itâs better than being charged every month for an account that youâre not using.
How To Find Alternatives To Worldpay Credit Card Processing
As weâve discussed above, merchants have found many reasons to leave Worldpay for a better (and more affordable) provider. The processing industry is extremely competitive, and providers are always trying to convince established businesses to switch to them from their current provider. Some companies will even offer to pay your early termination fee from your current provider if you sign up with them. While this might sound like a terrific deal, it usually is not. Why? Because nothing is ever truly âfreeâ in the processing industry, and any provider that will pay your ETF for you is almost always going to require you to agree to another long-term contract with them in exchange for this benefit.
So how do you find a better provider than Worldpay? We can help! Our article on how to choose a merchant service provider can guide you through the fundamentals of evaluating pricing, contract terms, and other considerations in selecting the best provider for your business. We recommend that you narrow your choices down to several of the best providers you can find and obtain quotes from each of them. Armed with this information, you can make an informed decision as to which one will (hopefully) offer you the best combination of fair pricing, flexible contract terms, and top-notch customer service for your business. There isnât a one-size-fits-all solution that works best for everyone, so bear in mind that a company thatâs good for a large, established business often wonât be a good choice at all for a small business. Once youâve decided on a provider, our article, How To Negotiate The Perfect Credit Card Processing Deal, can show you how to get the best terms from your chosen provider. Finally, if you have no idea where to start, our Merchant Account Comparison Chart provides a head-to-head comparison of some of the best merchant services providers in the industry.
Switching From Worldpay To Another Processor Isnât Easy, But It Is Possible
As weâve emphasized above, closing your merchant account is never an easy process, and providers deliberately make it as difficult as possible to discourage you from switching to a competitor. In this regard, Worldpay is no different from any other traditional provider that relies on long-term contracts to keep merchants on the hook for as long as possible. In fact, Worldpay’s willingness to accept a simple written request and offering to confirm your account closure via email puts the company slightly ahead of its competition.
However, you wonât have these kinds of problems in the first place if you sign up with a provider that offers true month-to-month billing with no long-term contracts to all their merchants. Many of our top-rated providers donât use long-term contracts or early termination fees at all, so closing your account is simply a matter of making a phone call or submitting a written request. You wonât have to worry about expensive cancellation penalties or continuing to be charged fees for months after youâve shut down your account.
If youâre unhappy with Worldpay — or any other provider — we recommend that you take a close look at your contract and see what it will really take to get out of it. Weâve outlined the steps above that youâll need to follow to put a bad provider behind you, hopefully without having to pay an exorbitant amount of money to do so. Good luck!
The post The Complete Guide To Switching From Worldpay To A Better Credit Card Processing Company appeared first on Merchant Maverick.
Few businesses have quite the same relationship with their equipment as laundromats. Essentially, your equipment is almost the entire draw of your business. Customers will be regularly paying you to directly utilize your equipment, so it goes without saying that you want to spend a lot of time thinking about your equipment purchases.
If you’re thinking about starting your own laundromat and want to get a sense of how much the equipment will cost, where to buy it, and how to finance it, you’ve come to the right place. Read on for more information.
The Equipment You Need To Start A Laundromat (& How Much It Costs)
If you’ve been to a laundromat, you probably have a general idea of what types of equipment you’ll need to get your laundromat up and running. Nevertheless, let’s lay them all out to make sure we’re on the same page. You’ll need, at a minimum:
Commercial washers ($700 – $25,000 each)
Commercial dryers ($1,000 – $20,000 each)
A payment system
Coin-based ($100 – $200 per machine, $700-$1,200 per bill-to-coin changer)
Card-reader system ($40,000 – $80,000)
Water heating system ($15,000 – $40,000)
You’ll probably want:
Tables for folding ($60 – $600/each)
Seating ($30 and up/each)
Laundry carts ($50 – $80/each)
Vending machines for snacks/detergent ($1,000 – $5,000/each)
This is the reason your customers will come! Commercial washers come in a number of different sizes, with capacity ranging from 1.7 cubic feet to over 4.5 cubic feet. Many laundromats provide different sizes for different loads, charging more for use of the larger machines. In general, top-loaders are cheaper than side-loaders but are less energy and water-efficient. Even so, there’s a pretty enormous range of prices for washing units. For any given model, you want to take into account the long-term costs of the machine in terms of both utilities and maintenance. If you’re aren’t hunting for the absolute cheapest or most expensive models, you can probably expect to pay somewhere between $1,000 and $3,000 per unit.
Most customers who use laundromats will also want to dry their clothes on site. Dryers can be heated by electricity or gas, but the majority of new laundromats will probably opt for electric (typically 240 volts) unless they already have a convenient infrastructure for gas. If you’re short on floor space, you may want to consider stackable dryers, which allow you to double the number of units you can fit within your shop. Expect to pay a bit more for the privilege, however.
Dryers generally have a larger capacity than washers, ranging from 5.5 to over 9 cubic feet, as more space is needed to effectively dry the same amount of clothes. Like washers, you can probably find decent units for between $1,000 to $3,000 each.
A Payment System
The once-ubiquitous coin-operated laundry is a rarer sight than it used to be, but it’s still a viable option for laundromats looking to minimize startup costs. The coin boxes, feeder slides, and wiring add a small amount of expense to each machine. You’ll also need to spring for a bill-to-coin changer or two to ensure that your customers have quarters to feed your machines.
The downsides of a coin-based system come into play down the road. While you won’t exactly be a bank, you’ll have a lot more cash onsite, which means you’ll have more security risks than you would with a card-based system. Those risks can add expense–collecting the coins, transporting them, etc.
A card-based system, on the other hand, offers a lot of long-term conveniences. You won’t have to worry about collecting or keeping track of coins, and your customers won’t have to worry about having cash on hand when they walk in. Even better, these systems make it easier to track your sales. Additionally, they can function a bit like loyalty cards, encouraging customers to come back and spend down the value on their cards. Some systems also allow you to offer perks like dryer credits.
The downside, of course, is that these systems are pricey to install, adding upwards of $40K to your startup expenses. If you can afford it, though, the general consensus seems to be that they’re worth it.
Water Heating System
If you’re offering warm and hot wash cycles, you’ll need a heating system for all that water you’ll be using. These systems come with or without a storage tank. The advantage of the former is that it keeps hot water at the ready for use, but utilizes more energy to do so. Either way, you’ll want to make sure your system is powerful enough to produce enough hot water for all your machines should they run at once. With a tank storage system, you’ll want to consider its recovery rate to make sure it can meet peak demand, whereas with a tankless system your concern should be with the amount of hot water it can produce on demand.
While not necessary per se, there are some other items that will improve your customers’ laundromat experience and help you stand out from the competition.
First, there’s the stuff that helps customers take care of their laundry. I’m talking about carts that make it easier to move wet laundry to dryers, and dry laundry to tables for folding. And speaking of tables, you’ll probably want those too. How about seating for customers who are waiting for their laundry to finish? And maybe a way to buy detergent, fabric softener, or dryer sheets if they didn’t bring their own?
Vending machines are a common sight in laundromats, and for good reason. Your busy, captive clientele are likely to get thirsty or peckish. It’s not unusual for such machines to be a significant source of revenue for laundromats. Vending machine prices vary quite a bit depending on the model and whether you buy new or used, but you’re probably looking at an outlay between $1,000 and $5,000 each.
The final consideration is entertainment. Let’s face it, doing your laundry isn’t the most exciting thing in the world. Sure, many customers have smartphones, but maybe they’d be more comfortable watching TV! How about some toys to occupy kids? And who doesn’t associate laundromats with old-fashioned coin-operated arcade games? While none of these are necessary, they can be difference-makers when people are choosing where to do their laundry.
Where To Purchase Laundromat Equipment
You can purchase laundromat equipment through a number of different sources. The option that’s best for you will likely depend on your budget, your location, and your business plan.
Laundromats are such a common business there are actually quite a few companies that exist primarily to service them. These distributors specialize in selling, servicing, and installing laundry equipment. They also usually deal in parts, which can be useful if you’re trying to keep older machines running. If you decide to use a distributor, make sure they have a good reputation and work with the brands you want to use. If you’re looking to keep costs really low, many distributors also deal in used equipment.
You can also try to buy your equipment directly from the manufacturer. While many brands still work with local distributors to sell their products, some also offer their own financing programs to help customers buy their products. Coincidentally, if you know the brand of equipment you want, you can often use a manufacturer’s website to find distributors in your area.
While they aren’t nationally known like some other industries, there are a number of laundromat franchises operating in the US. Plugging into a franchise usually raises your starting costs. You’ll have to pay a franchise fee upfront, conform to franchise standards, and may have to pay royalties every month. In exchange, you benefit from the franchise’s advertising and supply chains. Keep in mind, a franchise will most likely lock you into specific brands and layouts.
You can, of course, buy equipment from retailers, but unless you’re taking advantage of a great sale or can come to some kind of bulk buying/financing agreement, this probably won’t be the best way to purchase the majority of your laundromat equipment. It may, however, make sense to buy some of your smaller one-off purchases this way.
Laundromat Equipment Financing Options
By now, you’re probably realizing that equipment makes up a lot of the cost of starting a laundromat, with total costs for an average-sized laundromat ranging between $200K – $500K. If you don’t have that much money lying around under your mattress, you’ll need to seek other sources of financing.
If you have decent credit (620+) and would rather have monthly payments rather than a large initial expense, you can lease your laundromat equipment. Leases come in two general forms: capital leases and operating leases. Capital leases are effectively loan substitutes, meaning you’re financing equipment with the intent to own. Operating leases, on the other hand, are rental agreements that allow you to utilize equipment that is technically owned by the leasing company. This can be a useful arrangement if you want to frequently upgrade your machinery. If you’re buying from a manufacturer, see if they offer captive leasing, or are partnered with any equipment leasing companies.
Keep in mind, however, that leasing is almost always more expensive over time than buying.
If you’re looking to buy and can afford a downpayment, a slightly cheaper option than leasing is to get an equipment loan. Equipment loans are secured loans that use the equipment being purchased as collateral. This tends to result in better term lengths and rates than you’d see with a similar unsecured working capital loan.
The Small Business Administration can help new businesses that may not otherwise qualify for competitive loan rates and terms to get them. The two most popular programs, 7(a) and 504, can both be used to purchase equipment. The term lengths offered by these programs can spread the cost of your equipment out over a long period and give your business time to mature. Just be aware that applying for SBA loans is an involved, time-consuming process.
Start Your Laundromat Business Off With The Right Equipment
Remember, a laundromat is itself something of an equipment rental business, with the customer “borrowing” your machines for short intervals to clean your clothes. That means your equipment should be one of the top priorities of your business.
Ready to do some purchasing? Check out our favorite equipment financers. Confused about some of the terminology? Take a look at our breakdown of the differences between equipment loans and leases.
The post Laundromat Equipment Guide: Expected Costs, Where To Purchase, & How To Finance Laundromat Equipment appeared first on Merchant Maverick.
Tech equipment–computers, IT equipment, and related items–poses some unique issues for businesses trying to decide whether to lease or buy. Tech equipment becomes obsolete more quickly than almost any other type of equipment, making it a poor long-term investment. At the same time, many businesses need to keep their tech hardware up-to-date in order to remain competitive.
Should you buy or lease your tech equipment? Read on.
How Does IT Equipment & Computer Leasing Work?
The word “lease” is often associated with rental agreements — like the ones you sign when you rent an apartment or lease a new vehicle. While those examples are the most common, the term has grown to encompass a number of other types of agreements.
Capital VS Operating Leases
While there are an enormous number of lease types with names like “triple buyout lease” or “synthetic lease,” almost all of them fall under two major umbrellas: capital leases and operating leases.
A capital lease encompasses leases like conditional sales agreementsÂ as well asÂ $1 buyout leasesÂ andÂ $10 buyout leases. A capital lease transfers ownership of the item in question to you, the lessee, either immediately or early during the lease’s terms. For all intents and purposes, the item is considered yours–it’s an asset on your balance sheet. Compared to operating leases, you’ll have higher monthly payments but a much smaller residual payment at the end of your lease (hence the $1 buyout, for example). You rarely, if ever, have the opportunity to return the equipment at the end of your lease. And why would you? You’ve already paid for its entire value, plus interest. If this sounds a bit like a loan, it should. You’d essentially use a capital lease as an alternative to an equipment loan.
Operating leases are more traditional leases. In fact, they’re sometimes called “true leases.” With an operating lease, the leasing company retains ownership of the equipment while you’re giving operating rights to it. This means the equipment is considered an operating expense for your business, rather than a purchasing expense. The most common type of operating lease is the fair market value lease (FMV). Typically, monthly payments will be lower with operating leases, but the amount left over at the end will be larger. Operating leases usually give you the option of returning the equipment to the leasing company at the end of your lease. You also have the option to buy it for its fair market value price, but in most cases, you’d be better off with a capital lease if you prefer to keep your equipment.
If a lease has a buyout option, that means that you have the option to purchase (buyout) the equipment at the end of your lease. Many types of leases are named for the terms of the buyout. For example, a fair market value lease grants you the option of buying the item at its fair market value. A $1 buyout lease? You guessed it; you can buy the equipment for a dollar at the end of your lease.
Why the enormous difference in buyout amounts? Remember, a capital lease frontloads the cost of the equipment into your monthly payments. The $1 residual is essentially just a formality; you’ve already paid for the item. On the other hand, with an FMV lease, you’ve only been renting, so the cost to buy is based on what a used piece of equipment that age would cost on the market.
There are a lot more obscure types of lease agreements that you may run into, but generally speaking, you can expect capital leases to have small, insignificant residual payments and operating leases to have larger, more significant ones.
Common Lease Terms
Equipment leasing comes with a lot of jargon. Let’s demystify some of it.
Lessor:Â The company financing your lease. Think “lender” but for leases.
Lessee:Â The person or company taking out the lease. Think “borrower” but for leases.
Term Length:Â The length of your lease. A typical tech equipment lease may run anywhere from a year to five years. The longer your lease, the more expensive it will be in most cases.
Interest:Â The amount you’ll be charged in excess of the value of the equipment. Rates usually start at around 6% and top out in the high teens, though some may be higher depending on your credit, the lessor, and the type of lease you select.
Fees: These vary by lessor and state. They may include supplemental charges like administration, restock, insurance, and origination fees.
Monthly Payment:Â The amount of money you’re expected to pay your lessor every month.
Residual:Â An amount required to purchase the leased equipment at the end of the lease. Generally speaking, the lower your monthly payment, the higher your residual, and vice versa. Capital leases have lower residuals than operation leases.
Leasing VS Buying Computers & IT Equipment
So why would you lease tech equipment instead of buying it? Let’s look at some of the advantages and disadvantages of leasing tech equipment.
Advantages Of Leasing
Easy Upgrading: Tech equipment becomes obsolete very quickly, which can make it a poor longtime investment. An operating lease may allow you to stay up-to-date on the latest technology without having to re-purchase every couple of years. This can help small businesses keep up with the technological curve.
Smooths Out Cash Flow: Breaking the cost of your equipment down into predictable monthly payments has its advantages, even if you are paying more over time.
Shipping & Installation May Be Covered: Unlike business loans, leases more frequently cover the full expense of factory-to-operational expenses.
No Downpayment: With the possible exception of having to make your first month’s payment up-front, the entry costs of a lease tend to be very low.
Disadvantages Of Leasing
More Expensive: Between interest and fees, it’s pretty much guaranteed that you’ll be spending more money on the equipment than you would if you have purchased it outright.
You Can’t Easily Resell: If you want to offload your equipment before your lease is over, you may run into some legal complications. Make sure you know your lessor’s policies before you try to transfer ownership to a third party.
Legal Complexity: There are a lot of different types of leases with a lot of different rules. Is the item an asset or an operating expense? Well, that depends on the type of lease you have! Are you responsible for maintenance and upkeep, or is the lessor? Again, it depends on the type of lease you have.
You Need Good Credit: Given the responsibilities that come with leasing, most lessors want to see a solid credit score
Advantages Of Buying
Tax-Deductible: As a business owner, you can write newly purchased equipment off of your taxes.
Cheaper: It’ll be a bigger expense up front, but over the longterm, you’ll have saved a good bit of money.
The Equipment Is Definitely Yours: Want to resell, modify, lend it to your cousin in Tallahassee, or smash it with a sledgehammer? You can! (Check your local laws regarding e-waste, though, if you take the smashing option.)
Less Complicated: Buying is simple. You exchange currency for ownership of the item. There’s not much fine print to sift through.
Disadvantages Of Buying
You Need Cash On Hand: Buying means paying the price of the equipment all at once. That means you have to have a decent chunk of cash in your reserves — or be willing to take out a loan. This can be a big ask for businesses that run on thin margins.
You’ll Be Stuck With Obsolete Equipment: Tech equipment isn’t the best long-term investment. Eventually, you’ll be stuck with obsolete gear that isn’t easy to get rid of. And on that note…
It Depreciates Quickly: Ever tried selling your iPhone four years after you bought it? Tech moves quickly.
Computer Leasing VS Buying: Which Is Better For Your Business?
There are advantages and disadvantages to both buying and leasing computers and IT equipment. Consider leasing equipment with a high turnover rate if you work in an industry where being on the bleeding edge is advantageous. On the other hand, if you have modest tech needs and can comfortably use the same gear for longer than five years, it may make more sense to just simply buy the equipment you need. There are additional considerations for businesses trying to smooth out their cash flows or otherwise apply their limited resources to maximum effect.
Don’t have the cash to buy outright but aren’t sure if a lease is right for you? Consider an equipment loan. Not sure where to look for equipment financing? Check out our Best Equipment Financing Companies. Just starting out and need equipment for your office? Try our guide on how to Get The Equipment You Need For Your Startup Business With A Loan Or Lease.
The post Tech Equipment Leasing VS Buying: Should You Lease Or Buy Computers & IT Equipment? appeared first on Merchant Maverick.
It was a long time coming for many small businesses seeking relief through the Paycheck Protection Program (PPP). Now that they have the money and have read some of the fine print, some business owners are discovering that the program may not be a great fit for their specific circumstances.
If you have received a PPP loan but are having second thoughts about whether or not it’s a good idea to keep the money, you are not alone.
Many Small Businesses Are Discovering That PPP Funds Aren’t The Right Fit
With normal business patterns shattered into a million pieces by the COVID-19 pandemic and associated lockdowns, many small businesses looked to the PPP as a lifeline. Particularly appealing was the promise that businesses would be able to have the loan forgiven if they met specific criteria. But after a rocky rollout that took two separate rounds of Congressional funding (so far), the SBA is only just now formally releasing the specific guidelines and application for loan forgiveness. Early reports suggest more than 30% of PPP borrowers have returned their funds so far.
Preliminary guidelines for PPP loans had established that the loans would be used to keep employee paychecks going for eight weeks. Forgiveness was contingent on at least 75% of the loan being used for payroll. Less, but still some, of the loan could be forgiven if the business decreased payroll by way of staff or salary reductions. The uncertainty about what these thresholds are, and what other expenses the money can be applied to beyond payroll, have many business owners questioning whether they made the right decision. Complicating matters further is some confusion between the PPP and the SBA’s other major coronavirus intervention, Economic Injury Disaster Loans.
Reasons To Return Your PPP Funds
Not sure if you should keep or return the money? Let’s look at some test cases.
1) You’ve Weathered The Crisis Pretty Well And/Or Don’t Need The Money
While the pandemic has been a disaster for many businesses, some were better positioned to pivot to the new paradigm than others. A smaller number may even have unexpectedly seen their sales go up. Since this is all new territory for most businesses, no one could blame you for preemptively applying when you expected the worst.
The Treasury Department does require that borrowers certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
The good news is that if you borrowed less than $2 million through the PPP, the SBA and Treasury Department have stated in their latest guidance that they will assume you asked for the loan in good faith. While you won’t have to worry about any legal issues, you may still want to consider returning the money to avoid paying interest.
If you borrowed $2 million or more and aren’t certain you can convincingly demonstrate good faith, you should return the funds immediately to avoid any potential auditing and legal troubles (at the very least, you won’t qualify for loan forgiveness and will be expected to repay the loan). The “Safe Harbor” grace period to do so currently ends May 18, 2020.
2) You Don’t Think You Qualify For Loan Forgiveness
A 1% interest loan is nothing to sneeze at, but the fact remains that many PPP borrowers took out the loan with the expectation that it would be forgiven. To qualify for full loan forgiveness, PPP funds could be used for:
Payroll Costs:Â Capped at $100K/annually per employee, with sole proprietors and self-employed individuals also qualifying. No full-time salaries may be reduced by more than 25%. If you did have to cut wages, you have until June 30, 2020, to restore the salaries. It was expected that 75% of the loan’s value would cover payroll costs, including benefits.
Mortgage Interest: Of the remaining 25%, funds may be spent on obligations incurred before February 15, 2020.
Rent:Â Of the remaining 25%, funds may be spent to cover rent payments for two months so long as the lease agreement for the property was in effect before February 15, 2020.
Utilities:Â Of the remaining 25%, funds may be used to pay for utility bills.
You are, of course, expected to provide documentation of your expenses. If you struggled to retain headcount and don’t see it returning to normal until July or later, you may have anticipated meeting the guidelines but fell short in practice. If it doesn’t make sense to have a loan on your books, you may want to return the funds.
3) You Don’t Think You Can Pay The Loan Back In Two Years
If you don’t qualify for forgiveness, or only qualify for partial forgiveness, you’ll be stuck with an installment loan. A 1% interest loan with a six-month deferment is, by any objective measure, an absurdly good loan. That said, if your business is struggling, you may not have the spare revenue to pay it back within that time. In that case, it may make more sense to return the funds, especially if you want to qualify for federal loans in the future.
4) Your PPP Loan Conflicts With Another Program
The confusing patchwork of CARES Act programs can be hard to navigate, especially when you’re trying to figure out which ones are mutually exclusive. For example, if you want to qualify for the Employee Retention Credit (ERC), you can’t also receive PPP funds. This might be especially annoying for businesses that didn’t know about the ERC when they initially applied for a PPP loan.
Luckily, you can still claim the tax credit if you return your PPP funds by the May 18 deadline.
5) You’re Not Going To Make It
The unfortunate truth is that it will probably take a while for the economy to rebound and business to return to normal even after the lockdowns have ended. If your projections for your business aren’t looking good, you should ask yourself whether or not it makes sense to carry this debt.
How To Return Your PPP Funds
Contact whichever lender through which you applied for your PPP loan. They can guide you through the process of returning your funds to the Treasury Department. Remember that the Safe Harbor provision expires on May 18, 2020, so if you require leniency on the good faith provision, and/or you want to qualify for the ERC, you should begin the process immediately. Other borrowers who are considering returning their funds have a little more time to make that decision.
FAQs On Returning PPP Funds
Do Safe Harbor rules apply to small businesses, and what happens if I return the money after the Safe Harbor deadline?
In this regard, the most recent guidance does not appear to distinguish between the sizes of the businesses that received funds, only the amount they borrowed. If you borrowed less than $2 million, not much will happen to you; you’ll just miss the opportunity to qualify for the ERC. If you’re simply worried about not qualifying for full forgiveness, you can still return the money after the Safe Harbor period ends.
On the other hand, if you borrowed more than $2 million and can’t demonstrate that you borrowed in good faith, you may be subject to audit and possible further legal action.
Will I have to pay interest if I return the money?
If you return your PPP loan during the Safe Harbor window, you effectively never had the loan. After that, if your loan hasn’t been forgiven, you may be considered to have made a prepayment (check with your lender to be sure). There are no prepayment penalties on PPP loans.
Are PPP forgiveness rules going to change?
Difficult to know at this point. There are still some questions regarding how strictly the 75%/25% payroll/expense split will be enforced, how partial forgiveness will work, whether the eight-week loan period will be extended, and so on. Merchant Maverick will keep you updated on any changes that come down the pipe.
The post When You Should (& Shouldn’t) Return PPP Money & How To Return PPP Funds If It’s Not The Right Fit After All appeared first on Merchant Maverick.
Most businesses need equipment to run their operations at full capacity. What they may not have at any given time is the ability to buy all the equipment they need out of pocket. Equipment loans and leases can fill the gap, but borrowers with bad credit may worry that they’ll be locked out of the financing they need.
Below, we’ll take a look at some of the challenges borrowers with bad credit may face in trying to get equipment financing — and some of the equipment financing solutions they can use to get around them.
Is It Possible To Get An Equipment Lease Or Loan With Bad Credit?
The short answer is “yes,” but it may take a little more work.
Equipment loans are an interesting case. As secured loans, you might assume they’d be less risky for the lenders than many of the unsecured loans offered to businesses with poor credit. While there’s some truth to that, the longer-term lengths of equipment loans still mean it will be a while before your lender recoups their investment. Because of this, you’ll see many equipment loans with minimum credit score requirements in the mid-to-high 600s. That can put them out of reach of someone who has recently endured financial hardship. As is usually the case when it comes to lending, there are exceptions, however.
Equipment leases cover a much larger spectrum of agreements, although many of them are even more credit-contingent than those of loans. The amount of leeway you’re cut will depend on the type of lease you’re applying for, and your lessors’ business model.
Bad Credit Problems You Might Encounter
Before we get to the solutions, let’s take a look at some of the challenges you may encounter when you try to get equipment financing with bad credit.
1) Fewer Options
It may not be fair, but businesses with better credit will always have more options than businesses that don’t. Your search changes from “the best possible deal” to the “best deal possible with my credit rating.”
That doesn’t necessarily mean there won’t be a lot of options, however. Many online lenders specialize in financing customers with bad credit. Just expect to do your due diligence and make sure you’re dealing with a reputable lender that won’t needlessly gouge you.
2) Higher Rates
Even the lenders who don’t use credit ratings to rule out borrowers often still use it to segment their borrowers into different grades. The better your credit, the lower the rates you’ll qualify for. Likewise, the worse your credit, the higher your rates will probably be.
Keep in mind, however, that not every financer weights credit score the same. The degree to which the funder depends on credit will vary based on how many other sources of information they have on you regarding your fitness as a buyer. Repeat customers, for example, are often given leeway that new customers aren’t.
3) Unsatisfactory Terms
Credit issues may constrain the type of agreement you qualify for. For example, you may have to settle for a lease with a higher or lower residual than you may have wanted. Alternately, you may end up with a term length that doesn’t fit your needs.
4) Bigger Downpayments
In some cases, reluctant lenders can be placated by offering them more money at the beginning of your term. In the case of loans, this may come in the form of a larger downpayment. In the case of leases, they may ask for an additional month’s payment upfront. Depending on how much cash you have on hand, this may or may not create unnecessary strain on your bottom line.
You also run a higher risk of your application simply being rejected. Filling out applications takes time — time you could be spending on any other business-related-activity. Not only that, but too many pulls of your credit–especially hard pulls–can actually have a negative effect on your credit score.
The fewer applications you have to fill out and subject your credit to, the better.
7 Ways To Get Equipment Leases & Loans If You Have Poor Credit
So now you have an idea of the challenges you can face when looking for equipment financing while you have bad credit. Here are some ways you can overcome those challenges:
1) Improve Your Credit
It may not surprise you to hear that the best way to avoid having to apply for equipment financing with bad credit is to not have bad credit. Improving your credit takes time, but there are a number of different ways to go about it including:
Settling outstanding debts
Consistently paying your bills on time
Ask for higher credit limits on your credit cards
Don’t utilize all the available credit you have
2) Get A Co-Signer
You are more than a credit score. Financers don’t necessarily know that, but your friends and family do. If they trust you enough to do so, consider asking them to co-sign your loan if your lender gives you the option. Co-signing essentially adds an additional party as a guarantor for the loan or lease.
Just remember you’re putting your co-signer on the hook for your debt if you default. Be sure to read the fine print and make sure you understand what liens are involved and what kinds of assets are at risk beyond the equipment you’re financing. At the very least, both you and the co-signer will take a credit hit.
3) Take The Best Offer & Refinance
If you need help right away, you can always take a sub-par loan offer now and then refinance when you have access to better rates, either due to your credit improving or you having more time to hunt down a better deal. Keep in mind that this may not be an option with a lease, at least not until you’ve fulfilled your lease obligations.
4) Offer To Make A Bigger Downpayment
I mentioned this earlier under the “problem” section, but it’s also a solution. If your financer is on the fence about your application, you can sweeten the deal by offering to put more money down. In the case of a loan, it would be a larger downpayment. In the case of a lease, you could offer to pay the first and/or last month’s payment in advance.
5) Prioritize Equipment That Holds Its Value
When it comes to financing equipment, the equipment in question matters quite a bit. Remember, the equipment is the collateral. If you’re a lender, wouldn’t it be less risky to finance an item that retains more of its value over a longer period of time? That means you may have an easier time getting approved for, say, heavy machinery than you would an item that depreciates quickly, like a computer.
6) Prioritize More Expensive Equipment
Surprised? For the most part, big-ticket items tend to hold onto more of their value than less expensive items (consider how often you’d buy a tractor versus, say, a smartphone). If you default, your financer will prefer to collect an item that is still worth their time and effort to resell. Because of this, you may find that a prospective lender will be more accommodating if you have a more expensive piece of equipment in mind.
7) Defer Buying Until Your Situation Improves
While the newest models of a piece of equipment often come with intriguing bells and whistles, it doesn’t always pay to be an early adopter. If the older equipment you’re using right now still works or just needs minor repairs, it may be enough to carry you over the gap until your finances are in order. Besides, many times new models still have some bugs to work out.
Don’t Let Bad Credit Stop You From Getting Equipment Financing
Bad credit makes getting most kinds of financing more challenging, but it doesn’t necessarily have to stop you cold. With the right strategy and the right financer, you can get the equipment loan or lease you need to keep your business humming.
Need help finding an equipment financer? Check out our list of best equipment financers for small businesses. If you’re interested in more specialized guides, check out our resources on financing restaurant or gym equipment.
Confused about some of the terminology used in equipment financing? We can break down the differences between equipment loans and leases for you.
The post Bad Credit Equipment Leasing & Loans: 7 Equipment Financing Solutions If You Have Poor Credit appeared first on Merchant Maverick.
This post originally appeared at Kinsta Hosting Review: Pros, Cons & Alternatives via ShivarWeb
Kinsta Hosting is a rapidly growing, independent hosting company founded in 2013. Kinsta is focused exclusively on managed WordPress hosting with reliable customer support and Google Cloud-driven performance.
See Kinsta’s Current Plans & Pricing
What is Kinsta Hosting?
Kinsta is a non-traditional hosting company only offers one service – managed hosting for WordPress on cloud servers. They don’t offer email, reseller, or any other type of hosting. They do integrate some 3rd-party tools like DNS (from Amazon) and SSL (from LetsEncrypt) and CDN (configured on their Google Cloud network). Here’s their pricing chart.
Kinsta was founded in 2013 to meet the increased demand for managed WordPress hosting services (which I’ll touch on in the next section). They are a remote-first company with an emphasis on global service with support provided in 7 languages.
Their service is provided via Google’s Cloud Platform, and they have an exclusive focus on WordPress.
I’ve had a long-standing client who uses WP Engine (Kinsta’s direct competitor), and have had experience using the various managed WordPress hosting products across the hosting industry.
Background on Kinsta Hosting
To understand Kinsta’s product, you need to understand four concepts.
First, WordPress is the most popular content management system software on the Internet. People use it to run websites. It can run on any hosting setup with PHP, MySQL, and Linux. In other words, it can run on almost any web host.
Second, Web Hosting is space on a computer server that can run web applications and serve data to browsers (aka, it’s where a website lives). Web hosting can come in various setups, depending on the configuration. Shared hosting is the most common where a single server that can run PHP, MySQL, and Linux is “shared” among various hosting accounts. I explain more here.
Third, WordPress Hosting is space on a web hosting account that is specifically configured in some way to help WordPress software run better. I explain more here. The definition of “run better” can vary wildly depending on the hosting company since technically WordPress can run on almost any web hosting account. I wrote about the differences between Web and WordPress hosting here.
Fourth, Cloud Hosting is a large network of data centers configured so that customers can lease computing power & storage for web applications on demand, anywhere in the network instead of using space on a single web server. The largest cloud networks are run by Amazon, Google, Microsoft, Digital Ocean, IBM, and Oracle. I explain more here.
With those four background concepts in place, I can explain Kinsta’s unique position in the hosting world.
Kinsta runs managed WordPress hosting on the Google Cloud Platform. They actively lease computing power & storage on Google’s Cloud, configure it to run WordPress quickly & efficiently, and manage & support each installation.
In other words, they offer a niche but also potentially powerful platform. Because of how they mix & match all these services, they don’t compete head to head with many providers. But they compete indirectly with *a lot*.
How Kinsta Hosting Works
In some ways, Kinsta works just like any other hosting company. You sign up and pay every month. In exchange, your WordPress website runs quickly and efficiently.
But behind the scenes, their setup is a bit more complicated.
First, you’ll technically lease your hosting from Google, so unless Google goes down…your site isn’t going to go down. There’s no “crashing” like there could be on a typical web server.
Second, Kinsta has its cloud access explicitly configured for WordPress with things like server-side caching, security rules, staging environments, and more so that your site is faster than it could be on a vanilla Linux web server.
Third, Kinsta blends several 3rd party services for DNS (connects your domain to the host), SSL (secures your connection), and CDN (content distribution network) to make everything your website needs to work together.
Since they only have one product with no upsells, the signup is straightforward.
The entire setup operates from a single account dashboard where you control your WordPress installs.
I’ve been considering Kinsta for a client’s site, and decided to give them a try with a small site that I’m looking to consolidate.
Here’s my Kinsta Hosting review structured with pros, cons, ideal use cases, and alternatives based on my experience as a customer.
Pros of Using Kinsta Hosting
There are a lot of Kinsta Hosting reviews online – usually with user-generated reviews based on anecdotes and personal experience. That’s fine, but I take a different approach.
Like I mention in all my hosting reviews, there is no such thing as a “best” web host. It’s all about the right fit for your project based on your goals, budget, experience & expertise. Here are the pros (advantages) for considering Kinsta Hosting.
Cloud Hosting Benefits
Since Kinsta uses the Google Cloud Platform, you get many of the benefits of cloud hosting without many of the downsides.
A hosting account can be a lot of things to your business, but the core function of a hosting server is to serve your website files whenever someone requests them. But – the implied adverb there is to serve those files quickly.
In an age of global audiences and multi-device connections, speed matters more than ever. While there are a lot of variables in play with website speed, it’s primarily your hosting server’s job to send the requested files to the visitor’s browser as quickly and as efficiently as possible.
So here’s the thing – Kinsta uses the same servers that you use to access Google.com and YouTube.com. With Kinsta, as long as they are configured well, they are going to be fast.
Additionally, with server-side caching, your WordPress website will be ready to go. Now, there are still plenty of issues that can slow your site down, but they likely won’t be Kinsta’s fault.
Here’s my first test with my Kinsta website –
Again, if your site is loading slowly – it’s not Kinsta’s fault. It’s something with your site.
With the Google Cloud Platform, Kinsta can also offer data centers around the world. They have more than 23 at the time of writing ranging from Iowa to Southeast Asia and everywhere in between.
Their CDN runs on a global CDN network (KeyCDN) as well, so website assets can be staged close to any website visitor in the world.
It’s rare and expensive to build & maintain data centers around the world, so using Google’s infrastructure provides an advantage that a traditional hosting company can’t match.
Remember the last time Google went down? Yes, it happens. But it’s rare. And when it happens, it’s a newsworthy event. With Kinsta, that means that, outside of a bad configuration on their part, your site is not going to go down unless Google goes down.
Consistent performance and reliability are the main advantages of Kinsta since they can take Google Cloud and make it accessible and WordPress-friendly to regular customers.*
*Yes, you can go to Google and sign up for cloud hosting yourself. In fact, I have a non-WordPress site running there now. But to setup & run a database-driven CMS with integrated file storage takes some…patience and wherewithal. It’s not a simple one-click WordPress install. Also, Google does not provide support or configuration help. So, still a considerable advantage for Kinsta.
Configuration, Focus, & Usability
Kinsta built their Dashboard from scratch. Their signup is simple and straightforward. There are some hiccups that I’ll get to in the downsides, but overall, their configuration and usability is amazing.
Their focus on WordPress and simple plan structure also makes onboarding (i.e., going from a new signup to active customer) straightforward. The design is uncluttered, minimalist, and well-designed.
Their setup had jargon and technical information present, but it isn’t overwhelming and daunting like other managed WordPress hosting companies.
User-friendly Add-on Tools
While Kinsta does not have all the tools that traditional hosts make available, they do bundle several tools that are critical to running a fast, effective website. And again, unlike other managed WordPress hosting providers, they bundle them seamlessly in their dashboard.
DNS is the roadmap of instructions that connects your registered domain to your hosting, where your website lives.
Kinsta includes Premium DNS with all their plan levels, which makes setting up your website much simpler. Plenty of managed hosting companies (and even some website builders) leave the DNS up to their customers to figure out – leaving plenty of customers fiddling with TXT records, CNAMEs and MX records in vain.
Amazon provides Kinsta’s DNS. It’s reliable and integrated directly in their Dashboard.
A content distribution network (CDN) allows you to take the load off your main server by distributing media files and scripts around the world so that your website can load faster and with fewer resources on your server.
Again, not every hosting company includes this option, but Kinsta integrates it directly within their Dashboard.
An SSL allows your website to provide an encrypted connection between itself and your visitor’s browser. It’s an essential part of every website. Again, it’s something that Kinsta provides directly in their dashboard via LetsEncrypt. It’s not the best or name-brand SSL, but it does the job.
Kinsta provides website migration services to its platform. It can be confusing enough, moving an existing WordPress website from one shared hosting account to another. But moving it to a managed cloud platform can create all kinds of hiccups.
It’s a free service that would typically cost hundreds of dollars with a WordPress consultant.
Developer & Agency Tools
Kinsta provides a range of developer and agency tools that all sound either too dull or technical until you need them & use them.
They have well-implemented basics like built-in staging and user management so that developers can build client sites and hand them over with no hiccups or maverick approval processes.
Additionally, they have SSH access, WP-CLI, and allow different versions of PHP.
But the most interesting piece for me is the fact that they don’t lock customers into a single WordPress configuration AND they’ll support non-traditional setups like reverse-proxy configurations.
As an SEO consultant, having the flexibility of configurations is critical for working with large clients who want WordPress for their blog…but, not their main site. It makes a big content marketing sell much simpler since developer time can be outsourced to Kinsta.
Most customer support stories are either *really* bad or *really* good. It’s the one-star vs. five-star problem. Like I’ve said in most of my hosting reviews, I try to look and see if the company treats customer support as a cost center, a profit center, or an investment center.
Based on how they’ve integrated their knowledge base throughout their Dashboard (rather than stashing it somewhere), and the fact that they’ve grown their team mainly with support team around the world – it seems like they’ve deemed customer support as an investment center.
And that’s a good thing if you are a customer. You know they aren’t looking to make a buck off you, or push you off. Instead, they are trying to develop goodwill and increase word of mouth. Kinsta’s main “thing” is customer support, since it makes their whole product run.
Cons / Disadvantages of Using Kinsta Hosting
Like any web host, Kinsta has disadvantages. There are plenty of Kinsta complaints online. But remember, that like the pros, these are all in the context of your goals & priorities. With that said, here are the cons that I found while using Kinsta Hosting.
Kinsta is expensive.
No matter how you measure it – by WordPress installs, visits allowed, storage allocated, indirect competitor pricing, indirect competitor pricing – Kinsta is going to be competitive…but still the expensive option.
WP Engine is its most direct competitor. Kinsta does have more intermediate plans…but WP Engine has a pricing setup that can be a bit cheaper than Kinsta.
Competitors like InMotion Hosting and SiteGround offer comparable products for much cheaper (though they aren’t on Google’s Cloud). LiquidWeb does the same for managed WooCommerce websites.
And other indirect competitors like WPMU Dev do bundled cloud hosting with their plugin subscription that is competitive for agencies / developers.
There are two things pushing back on this disadvantage.
First, Kinsta is super-transparent about their pricing. There are no add-ons or excluded features like on WP Engine. There are no slight apples to oranges comparisons like you’d find with InMotion or SiteGround or LiquidWeb.
Two, expensive is a relative concept to value. Depending on the value that your website is generating, a few hundred dollars may or may not matter. If a few hours of downtime or a support misstep can cost you hundreds or thousands of dollars, then “expensive” is the wrong metric to look at.
On the flip side, hosting is a business cost. Any dollar that you save goes right to your bottom line. If you are on the fence about some of Kinsta’s features or have other website needs (see Feature bundles below), then Kinsta’s price is going to be a disadvantage.
Kinsta has some pretty low caps, especially compared to non-cloud competitors. Since they are working with leased infrastructure, they have to pass along any and all of their hosting costs.
If you’ve run a rapidly growing website, you’ll know just how quickly visits, storage, and bandwidth needs can escalate. If you are on Kinsta, you’ll never have to worry about needs taking your website offline. But you may have to worry about those needs hitting your bottom-line.
I have one client who built a silly side-project on his website (hosted on WP Engine with similar caps to Kinsta). The silly side-project took off – in a big way.
In some ways, the project brought in indirect revenue with backlinks, brand awareness, etc. But in concrete terms, it single-handedly tripled his monthly hosting costs because it blew past every visitor cap…and then the bots & spammers showed up. He’s on an enterprise plan with the same amount of “real” traffic that should put him on a basic plan.
Now, that’s a good problem to have. But it’s created decisions that honestly would not need to be made if he were using a Kinsta competitor with a managed VPS or managed WordPress hosting product like InMotion or SiteGround.
In fact, some of Kinsta’s features are capped at lower levels than you’d expect with their marketing. For example, think about WooCommerce and membership sites. They recommend PHP Workers that can handle excess queries. Here’s an explainer on how they work. But basically they help with the shopping cart / user roles while the server cache loads the rest of the page.
For their Starter and Pro plans, Kinsta only provides 2 PHP Workers…which is not recommended for ecommerce websites. In comparison, InMotion’s cheapest managed WordPress plan comes with a limit of 4 PHP Workers.
And again – many of these limitations come not from Kinsta (they are transparent about all this) but from their product structure…which is the next disadvantage.
Size & Company Structure
In a lot of ways, Kinsta is my kind of company. They are founder owned & operated. They are boot-strapped with zero investor funding. They are product-focused with a smart, thoughtful marketing strategy.
They are small enough to have direct contact with customers and processes. They are remote-first, global, and diverse. I’m glad to spend money with them.
But the hosting industry is structured the way it’s structured for a reason. And Kinsta is moving in the opposite direction of the rest of the industry.
Web hosting business is built based on the depreciation of fixed assets and high customer retention. It’s similar in many ways to the physical real estate industry. Almost every hosting company is away from pure-play hosting to becoming a hosting “platform” with lots of amenities.
Since Kinsta leases its infrastructure from Google, they use an entirely different business model. They have to have low overhead costs (ie, remote-first is a must), low acquisition costs (ie, their inbound marketing strategy), low labor costs and high pricing. Additionally, they are completely dependent on Google staying competitive & in the Cloud hosting business.
In other words, Kinsta is kind of like the WeWork of the hosting world (in a good way). Kinsta has avoided most of WeWork’s mistakes. But the core business model of sub-leasing servers while adding value via convenience, accessibility, and support is tricky.
WP Engine made it by using investor money to acquire market share and big amenities while building a hybrid data center. But others have failed or have been bought out – like FlyWheel and Nexcess.
Right now, Kinsta is committed to organic, long-term growth. But if you are looking for a 5+ year host, I’d pause and look around the industry before committing.
Feature Bundles & Add-Ons
Most direct and indirect competitors are moving to a “hosting platform” model with bundled plugins, themes, and other amenities. Almost all of Kinsta’s direct and indirect competitors bundle some sort of WordPress amenity with their managed WordPress hosting product.
WP Engine bundles StudioPress themes & products.
LiquidWeb bundles iThemes plugins & themes.
InMotion bundles JetPack and the BoldGrid website builder.
WPMU Dev bundles its premium plugins.
SiteGround bundles custom amenities like developer toolkits and email.
Pressable bundles JetPack and WP101 Training.
The flipside of this disadvantage is that Kinsta is truly focused on WordPress and hosting – they aren’t trying to compete with amenities and bonuses. They are just doing what they promise to do.
That’s great – and certainly a strength. But it’s also a downside for some customers.
Kinsta Hosting Alternatives & Use Cases
Just like cars, houses, appliances, etc – there is no such thing as a “best” host. There are just better & worse hosts for different customers with different needs. Here are some ideal use cases for Kinsta, along with some direct alternatives.
Growing Ecommerce or Membership Site
A growing ecommerce or membership website built with WordPress can create resource strains and technical demands. Kinsta’s architecture and support experience are really made for both types of sites (especially at higher pricing tiers).
Kinsta is a solid, straightforward, but still affordable option for ecommerce / membership websites that can pay a premium to have things “just work” with no troubleshooting. View Kinsta’s plans here.
Developer or Agency w/ Premium Clients
Kinsta is a great option for developers or agencies that build high-quality websites for premium clients with ongoing maintenance budgets.
Kinsta has the social proof, technical specs, pricing, and management tools that will assure brand name clients while still sticking with their budget expectations. View Kinsta’s plans here.
Premium Support & All-in-One Needs
Kinsta is ideal for DIY customers who run a high-margin website that needs premium support and/or all-in-one hosting needs. Kinsta’s monthly costs are high, but nothing considering the costs of hiring a WordPress developer to solve intermediate issues for a day (i.e., installing a new SSL certificate or repointing a subdomain). View Kinsta’s plans here.
Out of all the hosting companies that I’ve used myself or via a client, here’s how Kinsta compares directly with a few select ones.
Kinsta Hosting vs. WP Engine
WP Engine was the first company to offer a managed WordPress hosting product, and they’ve been the market leader ever since. They focus on the same customers as Kinsta. I’ve reviewed WP Engine here.
They have some advantages over Kinsta, including more features & amenities. But they are also more technically oriented with a more confusing backend. Kinsta is cleaner and simpler.
If you are a solo DIYer, developer, or small agency, you’ll likely gravitate towards Kinsta. If you are a corporate-type, you’ll likely gravitate towards WP Engine.
Kinsta Hosting vs. LiquidWeb
LiquidWeb moved into the managed WordPress space with their Nexcess acquisition. LiquidWeb is one of the largest independent hosting companies and has a specific focus on agencies and developers. They run their own data centers and have been around for a long time. They really excel with ecommerce websites.
Since they operate their own data centers, they have major price & feature advantages over Kinsta. But Kinsta’s setup runs on the Google Cloud and has better focus & usability since they *only* do WordPress.
If you are looking at cost but still want a lot of the developer features of Kinsta, you’ll likely go for LiquidWeb. If you like Kinsta’s focus & cloud setup, you’ll likely go for them instead.
Kinsta Hosting vs. SiteGround
SiteGround has been a rapidly growing host in the WordPress space. They have a big appeal among developers. They also have a global reach with data centers in the US, Europe, and Asia.
Since they operate their own data centers, they have a big cost advantage over Kinsta with managed WordPress hosting. They also bundle a lot of the same features as Kinsta including CDN, SSL, DNS, migration service, and user management. But again, Kinsta will likely still have some advantage with speed & performance since they run on Google’s Cloud.
If you are looking to save money but still have a developer-oriented company, SiteGround will likely be a better choice. If you prize speed & performance and have budget for Kinsta, you’ll likely go for Kinsta’s plans.
Kinsta Hosting vs. InMotion Hosting
InMotion Hosting is one of the most consistently growing hosting companies on the Internet. They are independent and have grown organically over the course of 20+ years. They offer a wide range of hosting products, including managed WordPress hosting, with a focus on small businesses.
Since they run their own data centers, they have a big advantage over Kinsta with pricing. They are able to offer much higher caps on features compared to Kinsta. For example, remember the PHP Workers mentioned earlier? Kinsta provides 2 PHP Workers compared to InMotion’s 4 Workers on their cheapest $8.99/mo plan. They also bundle a lot of business-friendly amenities with their plans (like JetPack for security).
If you are looking at the overall value of features & support for the price, InMotion Hosting would be a better fit. If you like Kinsta’s exclusive focus on cloud & WordPress, then they would be a better fit.
Kinsta Hosting Review Next Steps
Kinsta Hosting is an amazing option to have in the world of WordPress hosting. They have a fast, simple, solid product in a competitive field. If you have budget for a managed host and like the appeal of using the cloud, then Kinsta is likely an excellent fit for you.
See Kinsta’s Current Plans & Pricing
If you are looking for other options, check out the ones listed above, or explore my WordPress Hosting page.
Kinsta Hosting is a rapidly growing managed WordPress hosting service built on the Google Cloud.
There are many ways to build a successful business. Some business models involve selling lots of items each marked at a lower price, while others work by selling fewer things at a higher cost. With either path, the financial resources of your customers will come into play. You might soon realize that not everyone can afford the more expensive things you sell; similarly, not everyone has the resources or desire to buy a lot of small items in one purchase. Is there a way to solve this problem and increase your sales without cutting your prices?
Of course there is. In fact, there are many ways. One way is to advertise, so that a larger number of potential customers are brought to your door. Statistically, you should make more sales. Another way is to offer financing to your customers. Financing allows those who are wavering on a purchase because of the price to buy from you right away and then pay for the goods/services in installments in the future. This way, you don’t lose a sale to sticker shock. This is called customer financing or, sometimes, consumer financing.
Broadly speaking, you can provide customer financing yourself, or you can use a third-party financing specialist. As to how to do either, along with their pluses and minuses, read on to find out.
How Does Customer Financing Programs Work?
By customer financing, we mean any sort of buy-now-pay-later arrangement. Typically, the customer will have to pay a portion of the total cost before the goods/services are released. This sort of financing is usually a business-to-customer (B2C) arrangement instead of a business-to-business (B2B) arrangement.
If you want to offer customer financing, you can either provide that service in-house or you can work with a third party. We’ll discuss each option in more detail below.
In-House Customer Financing
By in-house financing, we mean that you, the merchant, take all the financial risk — and possibly reap all the financial rewards — when letting a customer walk away with your merchandise (or receive the benefit of your services) before you’ve collected in full. If you wish to consider this avenue, there are some items you might want to think through first.
If you wish to tackle in-house customer financing, you’ll need to consider your business’s finances first. Understand your cash flow and maybe do some financial projections.
Know that when you actually start to finance your customer’s purchases, you’ll have a period of reduced income because you’re not receiving the full payment for the goods or services you sell. At the same time, your customers might be making a greater number of purchases, so you would need to pay out to replenish your inventory. You’ll need to make sure that you have enough money to run the day-to-day operations of your business while you wait for the installment payments to come in and become a regular part of your cash flow.
If you are right and your customers start to buy more than before because they can now finance their purchases, then your cash flow should eventually increase after an initial dip.
When it comes to lending money and charging interest, both state and federal usury and debt collection laws may apply. If you fail to follow them, you might have to pay fines or be subject to other penalties.
When you provide financing to your customers, you might want to charge interest on the loan. If that is the case, be sure to check your state’s usury laws that govern, among other things, the highest interest rate you can charge. To complicate matters, if you sell online and a customer is in another state, you might be subject to that other state’s usury laws as well.
If your customer defaults on a loan, you might wish to collect that debt. Unfortunately, what you can and cannot do are also governed by federal and state laws. The laws typically restrict you on the amount you can collect per type of asset and how you are allowed to collect it. Again, the laws differ by state, so this can get fairly complicated fairly quickly. (Here’s an article from the consumer’s standpoint.)
If you wish to start an in-house consumer financing operation, be sure to talk to a lawyer specializing in this area first. They can help you design a set of best practices that are best suited for your type of business — and that stay within legal limits.
If you decide to start your own financing department, you’d probably have to hire new people. For instance, for every application, you might want to pull a credit report before deciding whether or not to lend. There would be additional paperwork and internal records to keep as the customer pays off the debt. If the customer fails to pay the debt, you would have to have someone to work on the failure to pay in some way, even if it’s just sending the account to a debt collection company.
Additional internal processes will have to be set up to smoothly move a customer through each step, from application to approval to installment invoicing. All this requires additional employee hours. So, whether you hire one person or ten people to handle the financing, you would have to consider these operational changes and expenses before making a final decision.
Lastly, not every customer will pay off their loan. We covered the legal aspects of debt collection above, but the more important aspect of bad debt is the financial impact on your business’s cash flow. Know how much bad debt your business can absorb without running into cash flow issues before you decide if you wish to move forward.
Third-Party Customer Financing
It’s always nice to be able to keep your hard-earned money, but now that we’ve gone through some of the major considerations for providing customer financing in-house, you might start to see the headaches that are involved as well.
Fortunately, there is an alternative. There are companies specifically set up to do customer financing or just debt collection (if you continue to wish to keep a portion of the work yourself). Some of these companies charge you nothing for sending a customer to them for financing, but others want a fee so that they charge you for sending a customer to them. They will also keep all the fees/interest the customer will pay to obtain financing. In return, they take care of all the legal and operational complications of customer financing for you.
If you continue to be interested in working with a third-party financing company, be sure to understand the details of how the financing company works before signing a contract. Understand your expected sales increase and your expected profit. If you sell low margin items, make sure that these financing charges do not exceed your profit margin. Otherwise, you would have gone through all this trouble for nothing.
Is Consumer Financing A Good Fit For Small Businesses?
Many large businesses provide consumer financing. For instance, you can finance a car purchase through any one of the major car manufacturers. Consumer financing is also available from some chain store home furniture sellers or large electronics stores. These are all large businesses that can afford a separate department–and sometimes even a separate corporate subsidiary–to take care of consumer financing.
But you’re a small business owner. Maybe you have only a handful of employees, and each of them is already busy taking care of other things. You already work twelve-hour days and things are still not done. How do you provide consumer financing when you’re already stretched so thin?
You might want to consider using third-party customer financing companies. This doesn’t preclude you from trying in-house financing in the future, if you pick one with a contract with no early termination penalties. It’s a quick way to get started, and it introduces you to an industry that you can become more familiar with, so you can make a more informed decision in the future.
Below are some pros and cons for your consideration.
Pros To Offering Third-Party Customer Financing
No Need To Increase Staff: The most obvious advantage is that you won’t need to hire more people to run the financing. As a small business owner, you know how difficult it is to find the right person–one who has the knowledge needed as well as the proper “fit” for your business. It might take several tries to ultimately find the right person, but with third-party financing, you won’t need to do that.
No Need To Worry About How The Details Work (e.g. credit checks): There are a lot of things you would have to set up from scratch to start an in-house customer financing operation. You’ll have to have the application forms, know where to run credit checks, figure out how much risk you can take, and give the customer the credit needed to make the purchase. With third-party financing, you won’t have to worry about any of this. You just send the customer to the financing company, and they take care of the rest with their existing workflow.
Legal Compliance:Â As already touched on above, when it comes to lending money, there are a lot of legal issues that could arise. If you’re in the US, then not only would you have to understand federal laws that could affect your operations, you’ll have to understand multiple state laws as well, if you operate an online store. These laws change from time to time, so you can’t set up a process and forget it. It would be easier to let a third-party financing company worry about following the laws. They might still (hopefully only accidentally) violate these laws, but at least if they do, they would be responsible for it. (Be sure the contract clearly states they’re responsible for any legal compliance issues.)
Less Need To Worry About Cash Flow:Â While you might still have to invest more money into your business to have enough inventory for increased sales, you are less likely to have to worry about a healthy cash flow by using a third-party financing company. A lot of these companies will fund you within two to three days of purchase, so you shouldn’t have to worry about cash flow at all.
Cons To Offering Third-Party Customer Financing
The Reputation Of The Financing Company Will Affect Your Own Reputation: A company’s reputation, especially where money is concerned, matters. When you recommend a financing company to your customer, like it or not, you’re guaranteeing that the company is reputable. If this turns out to be incorrect, then the bad reputation rubs off on you too. A business’s reputation is everything, and a bad one will run customers away from you.
Customers With Bad Experiences Might Not Come Back: Even if customers clearly understand that the financing company has nothing to do with your business, a bad experience with the financing company could still prevent them from coming back to you. Their shopping experience is ruined, and it’s highly likely they will subconsciously connect that bad experience with you. It’s not difficult to imagine that they might go elsewhere to shop in the future.
Customers With Bad Experiences Might Blame You: Related to the above, we know that people don’t always notice things that they should. This is why there will always be a portion of the customer base that thinks you and the third-party financing company are one and the same. If anything goes wrong, it’s very likely that they will blame you for the financing company’s mistakes. They might go online to complain, giving you a bad reputation that you don’t deserve.
You Must Share Revenue:Â Naturally, these third-party financing companies can’t provide their services for free. In fact, in addition to keeping the interest and fees paid by the consumer for the loan, many will want you to pay them for their services as well. Maybe your margins are high and you don’t mind, but if you do mind, then you’ll need to pick the financing company carefully.
Possible Long-Term Contract: Some third-party financing companies will require you to sign a long-term contract. As with all contracts, you’ll need to look at the possible penalties if you need to get out of the contract early. One contract we reviewed when researching for this article allows you to cancel but requires a 12-month notice period, which is basically the same as not being able to cancel at will. Make sure you’re not stuck with a company that you won’t want to work with for one reason or another (e.g. bad reputation) for longer than necessary.
How To Offer Financing To Customers: Options For Online & Brick-and-Mortar Businesses
If you have decided to offer financing to your customers, the way you tell your customers that financing is available and invite them to apply will depend on whether you operate a physical store or an online store — or both. It also depends on whether you’ve decided to do this in-house or through a third-party specialist.
If you’ve decided to offer financing in-house, then you can advertise any way you want to, as long as you have the application readily available for an interested customer to sign up. However, if you’ve decided to go with a third-party provider, then there are several ways to deliver information about the financing offer and payment options.
Online Customer Financing
For webstores, customer financing is often offered at checkout. The customer sees a financing button, along with other payment choices such as credit or debit cards. If the customer clicks the financing button, they must respond to a few questions. A “soft” credit check is performed. With some companies (e.g. Affirm, Afterpay), a decision to lend is made based on the soft check. With other companies (e.g. Square), a hard credit check is eventually required. (If you’re curious, this article explains the difference between soft and hard credit checks.)
After this, the customer is presented with a choice of how they want to finance the purchase–i.e. how many installments, how much per installment, and interest or other fees. Once the customer makes a pick, the online merchant is paid by the financing company, typically within a day or two after shipping.
As to the rest of online financing, a merchant is often supplied with banners and buttons that they can place on their website to announce that financing is available.
In-Store Customer Financing
If you run a physical store, then customer financing is done a little differently, though you’ll still need a connection to the internet just like online financing.
There are several ways a customer at a physical store can apply for financing. One financing company offers free-standing kiosks that customers can use to apply. Tablets can also be loaded with financing application software for the store clerk to hand to the customer. Yet others simply have the store clerk ask a few questions of the customer at checkout and enter that information online. Lastly, a customer can apply for some specific amount beforehand, the financing company can issue the customer a single-use virtual card, and the card number can be keyed in by the merchant just like any keyed-in credit card charge.
How Much Does It Cost To Offer Customer Financing?
The cost to offer customer financing runs the gamut, from free to something similar to the swipe of a credit card. It’s not always easy to find this cost on the provider’s website, however. (It’s much easier to find out how much the customer will be charged for taking the financing offer.) Very often, the company simply does not disclose the charges to the merchant but instead tries to sell their services as a way to increase sales. You can only find out the cost after you contact them.
Ten Customer Financing Programs For Small Businesses
For this article, we did a quick survey of the companies currently providing customer financing services for small to mid-sized businesses. We briefly discuss the companies we found below, but we haven’t reviewed most of them, so please be aware that we pass no definitive judgment about the quality of service each provides. We hope to have some reviews for you in the future.
In looking through these companies, we find that they can generally be categorized into three groups. The first group contains more traditional financing companies. Financing applications may take a day or two to process and be approved. A second group includes the so-called fintech companies–they have their origins in the tech startup world, and they’re here to “move fast and break things.” These companies tend to do a soft credit pull and then give you a loan within seconds. These loans tend to be of a smaller amount and they typically must be paid back within a year. Some of them are fee-based and do not charge interest. The third group seems to be a hybrid, featuring some characteristics of both the traditional and the fintech companies. They also do a soft credit pull and sometimes can offer you a loan for a very small amount very quickly. Typically, larger loans are also available with these companies.
Grouping the vendors we found below into the three categories above, we have:
With some of these companies, it was hard to find merchant-related information–i.e. sign up cost, processing fee, contract terms, etc. These companies tend to try to sell their services by touting how much more a merchant can sell if the customer had the ability to buy more. Signing up with them might mean that you never get to see any income from the financing side. Still, they seem to be worth investigating, so we encourage you to find a few that you might be interested in and contact them for details.
Lastly, if you look at the way these companies work–especially the fintech companies–you’ll see that there’s a strong potential that they might replace the entire merchant processing side of the credit card industry. If you look carefully about the nature of the credit approvals, loan amounts, and repayment terms, you’ll see that they work like charge cards, where each charge is judged separately based on the person’s current debt load and creditworthiness. It’s very similar to the American Express model. From a merchant’s standpoint, it might be a good idea to understand how these financing companies work, in case they do replace some credit card company functions in the future.
With the above in mind, here are some of the customer service companies we found that you might wish to look into further.
Flexxbuy seems to fall into the more traditional side of the consumer lending business. It has a relationship with over 20 lenders in its backend and can quickly set a customer up with the right lender, depending on the customer’s credit score.
With Flexxbuy, the customer can get a loan of up to $50,000. The website isn’t quite clear, but the wording in various places suggests that smaller loans might be approved instantly, but the larger ones can take up to 48 hours. There is a formal application to be submitted by the merchant. The customer doesn’t have to pay a penalty for pre-payment, and loan payback can be from 12 months to a few years.
Flexxbuy says the cost to the merchant is “customized,” and, since they work with several lenders, this probably just means that the cost varies depending on the lender. To sign up with Flexxbuy, there is an enrollment/setup fee for the merchant.
LendPro, like Flexxbuy, seems to fall towards the traditional lender side of the industry. They claim that they have lending relationships with more than two dozen lenders on the backend to provide financing for a wide range of amounts and for all types of credit scores.
When a customer finances through LendPro, the lending relationship is directly between the customer and LendPro. LendPro can integrate their financing application software with your website, so customers can see their financing options at checkout and file an application if they are inclined. They also have physical kiosks for physical stores, where a customer can apply for credit in person. A merchant can also buy a tablet and install LendPro’s software on it and then hand the tablet to the customer to apply for financing.
There are no other disclosures about how a contract with LendPro would work or how much they would charge the merchant per transaction.
Snap Financing calls itself a “lease to own” company. This means that, as a merchant, you might be sending your merchandise out to consumers, but you still own the item until the lease term is up. Then, the consumer can either buy the item outright or return it to you.
Lease-to-own arrangements are typically used for large furniture, appliances, electronics, and computers. If the goods are damaged during the lease, they still belong to you. (Presumably, you can deduct the damage from the price.) With Snap Financing, you’re working with a somewhat traditional business model. While it’s not clear on the website, it seems from the nature of the business model that the merchant still owns the sales contract. If the customer defaults on the (unsecured and high-interest) loan, then the matter is between Snap and the customer.
Snap funds your business within 2-3 days once the leased goods are delivered, so you are fully paid.
Affirm falls squarely within the fintech label, and it has the pedigree to prove it. The company was founded by Max Levchin, who was one of the founders of PayPal. Even now, it’s still taking money from venture capital firms, with the latest round of funding raising $300 million USD.
Affirm’s website is geared more towards the consumer than the merchant, so there are not a lot of details on how (or if) they charge the merchant to process a customer’s loan. On its backend, Affirm’s loans are financed by two banks: Cross River Bank and Celtic Bank.
The Affirm financing application can be integrated into various eCommerce shopping platforms and be shown to a customer at checkout as a push-button option. When a consumer applies, Affirm performs only a soft credit pull and then makes a decision to lend based on that pull. There’s no stated loan limit. If the purchase is made from an online store, then the payment can be applied at checkout. If the payment is at a store that’s not affiliated with Affirm, then Affirm issues the customer a single-use virtual card that can be used like a credit card.
Afterpay is yet another fintech company. It has a business model that looks very similar to that of Affirm, and it is also funded by venture capital investors. While Affirm seems to focus on providing financing for goods and services that cost a bit more, Afterpay seems to be focused on things that cost a little less.
Afterpay discloses a little more on their website on how they work with merchants. When the merchant makes a sale, the purchase is made between the merchant and the buyer. But the merchant immediately assigns the purchase contract to Afterpay so that Afterpay has the right to recoup nonpayment. After that, the merchant is still responsible for taking care of complaints and returns, but any questions on payments belong to Afterpay.
Afterpay’s services integrate with many existing online shopping carts. Consumers are presented with Afterpay as a payment choice at checkout, and they can apply for credit that way.
Afterpay checks the consumer’s credit with a soft credit pull and, once approved, the consumer is presented with several installment payment options and can see fees and the payment amount for each. The consumer picks whichever option that appeals to them. They can be charged a late fee, but there’s no interest or service fee on the amount borrowed, and of course, the customer can prepay or fully pay before the payment is due.
To borrow from Afterpay, the consumer will have to have an Afterpay account. A credit or debit card must be linked to the account, so Afterpay can automatically withdraw the installment payment from the account. (Which begs the question: why not just use the credit card instead?)
ViaBill is a European fintech startup. Merchants in Denmark, Norway, and the US can sign up with ViaBill.
Like Affirm, ViaBill focuses on bigger ticket items. They offer easy integration with online shopping platforms, easy and fast approvals, and installment payments linked to the debit or credit card used to set up the consumer’s account. The payment is broken into four installments, with the first installment due immediately at checkout. Afterward, ViaBill assumes the risk of fraud and credit risk. If the customer fails to pay, they are charged a late fee (but no “penalty fee”), and ViaBill handles everything related to non-payment/collections.
For merchants, ViaBill charges 2.90% + $0.30 per transaction, which is comparable to some credit card processing charges. After the goods are shipped, the merchant assigns the right to receive payments to ViaBill, but ViaBill may assign the right back to the merchant to deal with chargebacks, disputes, item returns, and some other conditions.
When a merchant signs with ViaBill, the contract can be terminated by ViaBill at any time for any reason or no reason, while the merchant can only cancel for any reason or no reason in the first three months. Thereafter, the merchant must give ViaBill 12-months notice before the contract can be canceled.
There is a setup fee to connect up to ViaBill. They fund the purchase five days after shipping. Be aware that if you sign with ViaBill, they don’t want you to work with any other consumer financing provider unless you both agree in writing that you can.
Vyze is a fintech startup that began in 2008. It was acquired by Mastercard in 2019, so if you sign up with them, you at least know that they are backed by a reputable business. Vyze doesn’t seem to be doing anything too different from the other fintech startups, however, so there might not be any other specific benefits to working with Vyze.
Like other fintech companies, it seems Vyze only does a soft credit pull; consumers can apply with just a few quick personal details. A customer can apply online, or if at the checkout of a physical store, apply from the store’s tablet loaded with Vyze’s app.
Once Vyze has the customer’s credit information, the software queries a first lender for approval. If the first lender rejects the application, then the software automatically pings a second lender in the queue, and then a third, and so on until one lender approves the financing.
Vyze’s website does not have much information for the merchant, so it’s difficult to tell if/how much they charge you for each customer you bring them, how they would handle returns or chargebacks, or any other details of a merchant’s contract with them.
VIP Financing Solutions
VIP Financing Solutions has an interesting business model. It seems to be a credit card processor that also does consumer financing (or vice versa). You can get Clover POS stations from them (it’s unclear if they sell or lease them, so be careful). They also have multiple lenders in the backend to support their financing activities.
No matter what you do with VIP, whether it’s credit card processing or customer financing, you’re charged the same rate: a 3.0% “Merchant Fee.” The website also claims that you’re not charged a credit card processing fee, but that 3% seems to cover more than enough of the usual fees associated with credit card processing. Once the charge is cleared, you are funded within 48 hours.
As to financing, VIP offers three types of financing:
A Store-Branded Credit Card:Â The shopper can be instantly approved and walk out with a card, which basically is a revolving line of credit specific to your business.
A No-Credit-Check Loan: The amount can be between $500-$35,000. The repayment is divided into four installments, to be paid within a short period of time.
A Traditional Personal Loan: Approval can take a few days, with repayment plans of up to 60 months.
We couldn’t find a merchant contract on VIP’s site, so we don’t know other details about how VIP works with its merchants.
If you are already a PayPal merchant, then you can offer consumer financing through PayPal Credit. Just activate the service as a form of permissible payment. Then you can advertise that the service is available by adding promotional banners already prepared by PayPal to your website.
When a customer uses PayPal Credit, the merchant is paid upfront (i.e. no need to wait for the customer to completely pay back the loan to PayPal). PayPal does not disclose how much it charges per transaction, but it also doesn’t say that the cost would be different from other PayPal transaction charges. So, each transaction likely costs the same as other PayPal payment transactions.
From the consumer’s standpoint, PayPal Credit is a loan between PayPal and the consumer. Once PayPal’s underwriter approves the loan, the consumer has to make minimum monthly payments. For purchases over $99, as long as the consumer pays the loan back within six months, there’s no interest on the loan. However, if the loan is not paid back completely within six months, interest is charged from the date of purchase.
PayPal will pull a soft credit check before approving a loan. The minimum starting credit is $250, and this might be increased from time to time. You can use the money in PayPal Credit to send to family and friends, just like sending cash. And, just like sending cash, you pay 2.9% + $0.30 per this person-to-person transaction.
The service is available to US consumers only.
As with PayPal Credit, if you’re already a Square merchant, you can use Square Installments. Square Installments can be used from the point-of-sale or from your virtual terminal, and they cost 3.5% per transaction. You can also integrate Square Installments into your electronic invoice, and that service costs 2.9% + $0.30 per transaction.
For a merchant to sign up, navigate to your dashboard and look to see if you’re already approved for Installments (approval sometimes depends on industry or location, business type, and/or volume and price of goods sold). If you are, then you’ll have to watch a video and answer a few questions to make sure you understand the terms of service. That’s all you need to do. You can cancel the program at any time. There’s no added integration needed, and Square can provide all the buttons and banners you need to advertise online to your customers that the service is available.
For your customers to apply for financing, they follow a link customized for your business and then enter their information. They will quickly get an offer after a soft credit pull, and the offer will include various monthly plans and total fees. Square pulls a full credit check if the customer elects to go forward with financing. Square Installments are used for purchases of $150 and up and the repayment terms are for up to 12 months.
For physical stores, Square Installments can be used with a digital card, which can be keyed in like any other purchase. The merchant is paid right away, and if the customer misses a payment, it doesn’t affect the merchant.
Here’s a more detailed article about Square Installments, if you’re interested in learning more.
Should I Offer Third-Party Financing For My Customers?
There are a lot of data-based arguments out there that suggest that making financing available to your customers translates to more sales. As a small business owner, the easiest way to do this is to go through a third-party financing company so that you won’t have to deal with the paperwork, the possible cash flow issues, the legal aspects of lending, and the defaults when a customer refuses to pay.
Third-party lenders aren’t willing to do all this for free, of course. Some will charge you a fee, and it’s important to understand how this fee works. It’s also important to think through other issues, such as how chargebacks and returns will be handled. Of the companies we surveyed above, many do not disclose much about how they work with the merchant at all. If you decide that you’re interested in working with one of these companies and contact them, be sure to ask questions such as:
Do they charge you for sending a customer to apply for financing?
Do you get a finder’s fee for sending customers?
How do they deal with merchandise returns? Are you required to accept a return, or can you simply refuse? Do you have to return the money to the customer? Or is that handled between the financing company and the customer? And if so, will the merchant have to return the money to the financing company?
How do they deal with disputes/chargebacks? What about fraud, such as a customer claiming that you didn’t ship a product when you actually did?
How do they deal with defaults? Some companies assign defaults back to you and you’d have to deal with that, so that seems to create more headaches for you.
Who handles customer service? If this is divided between the merchant and the financing company, how do you share the responsibility?
How quickly are you funded, and at which point in the process does a sale count as a sale?
You might have more questions, so be sure to write them down before you contact a financing company. That way, you won’t accidentally leave out a question.
If you decide that providing customer financing is just not for you, but you still want to explore ideas on how to increase the cash you have at hand to grow your business, be sure to check out some of our lending articles. We have picks for the best small business loans, advice on how to get a line of credit, and even information on startup grants. You might also want to consider invoice factoring or invoice financing.
Lastly, if you have had any experience with any of the providers above or want us to do a detailed review of a specific provider, do let us know by leaving a note below.
The post The Complete Guide To Customer Financing For Small Businesses appeared first on Merchant Maverick.
The Paycheck Protection Program (PPP) is bringing much-needed relief to small business owners affected by the coronavirus. Not only does this loan program provide funding to help cover payroll and other expenses, but if used for qualifying purposes, your loan will be forgiven.
Yes, you read that correctly. A PPP loan can help your business right now without throwing you into debt further down the road. Are you thinking to yourself, “What’s the catch?” There is a catch, but fortunately, it’s a small one. You must spend your PPP loan funds on qualified expenses. That’s it.
If it sounds simple, that’s because it is. In this post, we’re going to help you understand how you can qualify for PPP loan forgiveness. We’ll explore qualified expenses, what you need to track, and even what happens if you spend your funds on non-qualified expenses. Whether your funds have already hit your bank account or you’ve just started the application process, read on to learn more about PPP loan forgiveness and what expenses can be covered using these funds.
Requirements For PPP Loan Forgiveness
The requirements for having your PPP loan forgiven are surprisingly lenient. It is, however, vital that you understand and follow these requirements. Otherwise, you will be required to pay back all or part of your loan.
Loan Proceeds Must Be Used For A Qualifying Purpose
If you receive a PPP loan, you are limited in how you use your funds. We’ll go into the specifics in the next section. For now, just understand that this loan is meant to help you pay and retain your employees if your business has been affected by the coronavirus.
Funds Must Be Spent Within 8 Weeks
Your loan is calculated to provide you with eight weeks of capital to pay employees and cover other qualified costs. To be forgiven, loan proceeds must be spent within eight weeks of receiving the loan.
You Must Maintain Your Full-Time Staff
Because this loan should be used to help you pay your staff, it makes sense that one requirement for loan forgiveness is that you must maintain the headcount of your full-time employees. If you had five employees at the time of applying for your loan, you should continue to have at least five full-time employees on your payroll.
Now, what happens if you had to lay off employees in between applying for your loan and receiving the funds? This loan gives you a short amount of time to rehire. You will have until June 30, 2020, to restore staff as a result of any changes made from February 15, 2020, to April 26, 2020. You will be required to pay back all or some of your loan if you fail to maintain your staff based on these guidelines.
You Must Maintain Your Payroll
Your payroll costs must remain the same as they were when you applied for funding. If you decrease salaries or wages, you may be required to pay back a portion of your loan. To be eligible for loan forgiveness, you can’t reduce the salary of any full-time employee earning less than $100,000/yearly by more than 25%.
If you had to cut salaries or wages as a result of financial challenges caused by the coronavirus from February 15, 2020, to April 26, 2020, you have until June 30, 2020, to restore these salaries and wages.
Qualified Expenses For PPP Loans
As mentioned in the previous section, PPP loans can only be used for certain expenses. If you use your loan for anything other than these expenses, you will not qualify for full loan forgiveness. So how exactly can you use your funds?
Your PPP loan funds can be used to cover payroll expenses so that you can keep your business staffed. Various payroll costs are qualified expenses, including:
Salaries, Wages, Tips & Commissions: Capped at $100,000/annually per employee.
State and local taxes on compensation
Employee Benefits: This includes costs associated with retirement plans, group health insurance, separation or dismissal, vacation time, sick and medical leave, and parental and family leave.
If you’re a sole proprietor or independent contractor, self-employment wages, salaries, and commissions not exceeding $100,000/annually also qualify as payroll costs.
These costs will need to be proven by submitting payroll documentation. For small businesses, acceptable documentation includes:
Payroll Registers: Should be from the last 12 months
Business Bank Statements: Should be from the last 12 months
If you’re an independent contractor or sole proprietor, documentation proving payroll costs include:
Tax Forms: 1040 Schedule C and 1099s
Income and expense reports
Other documentation may be acceptable — ask your chosen lender for additional details.
Your PPP loan can be used to pay mortgage interest. Mortgage interest obligations must have been incurred before February 15, 2020, to be a qualified expense.
Make sure to have documentation showing the mortgage interest that was paid. Acceptable documentation includes receipts, bank statements, account statements, and canceled checks.
If you rent your commercial space, you can use a portion of your funds to cover rent over the next two months. To be considered a qualified expense, a lease agreement for the property must have been in effect before February 15, 2020.
Again, you need to keep all documentation proving your funds were spent toward this qualified expense. So don’t forget to hang onto your account statements, receipts, bank statements, and canceled checks.
Struggling to keep the lights on at your business? Good news — you can use a portion of your loan to cover your utilities. To qualify, service for these utilities must have occurred before February 15, 2020.
Once again, you’ll want to have documentation proving that these utilities were paid by keeping account statements, bank statements, canceled checks, and receipts.
One last thing to note is that at least 75% of your loan must be used to cover payroll costs. The remaining 25% can be used to pay mortgage interest, utilities, and rent.
What Happens If I Don’t Qualify For Forgiveness?
If you use your loan for qualified expenses, your loan will be forgiven. But what if you make a purchase that isn’t a qualified expense or fail to meet other requirements? If this is the case, you will be required to repay at least a portion of your loan.
As previously mentioned, there are a few things that can prevent you from receiving 100% forgiveness on your PPP loan. As a quick reminder, those are:
Using your loan funds for another debt obligation that isn’t your payroll, rent, utilities, or mortgage interest
Using more than 25% of your loan for rent, utilities, and/or mortgage interest
Reducing your employee headcount
Reducing the wages, salaries, or commissions of employees
If you don’t qualify for full loan forgiveness, you will be required to pay back loan funds plus interest. The interest rate for PPP loans is 1%, and you will have two years to repay your loan. Payments are deferred for six months, although interest will continue to accrue during this time.
When & How To Apply For Forgiveness
You will apply for PPP loan forgiveness through the lender that serviced your PPP loan. There are no requirements set by the SBA, so your specific lender may require additional documentation or have their own instructions for submitting a loan forgiveness request.
At a minimum, you should make sure that you have documentation that shows how your loan was spent. Your lender may require payroll documentation, bank statements, account statements, tax forms, receipts, and canceled checks. Additional documentation may also be required, so make sure to ask your lender what needs to be submitted to avoid delays.
Once your lender has received everything, they must make a decision on the status of your loan forgiveness within 60 days.
Other Resources For Coronavirus-Affected Small Businesses
The coronavirus has affected all of us, and many small business owners have been hit hard by the pandemic. If your business is suffering financially, don’t give up hope — there are some great resources to help you through this time of economic uncertainty. We’ve been doing our research and have created a number of posts dedicated to coronavirus relief. Check out our COVID-19 hub to learn more about the EIDL program, read industry-specific survival guides, and access our other small business resources. Good luck!
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Businesses that have exhausted normal methods of acquiring capital may find themselves turning to less known methods, such as vendor financing. Like most forms of alternative financing, it’s less a broad solution and more a specific help for small businesses whose needs fall into a specific niche.
Is it the best choice for your particular small business financing needs? Read on to find out.
What Is Vendor Financing?
What is vendor financing? Another obscure form of alternative lending to keep track of? I know, I know.
Luckily, the basics of vendor financing (sometimes called seller financing) aren’t that complicated. Instead of approaching a third-party (a bank or online lender, for example) to get financing for a product or service, the vendor selling you the product finances it instead. Essentially, they’re providing the means to purchase their own products.
Since the vendor is taking on substantial risk in this type of arrangement, vendor financing is usually only an option for businesses that have a strong working relationship with the vendor, although there are exceptions.
How Vendor Financing Works
In a way, vendor financing harkens back to the barter system, with two businesses making a trade.
Vendor financing typically takes one of three forms, which I’ll go into in the next section. In either case, the vendor will allow you to acquire their goods or services in exchange for:
A promise of repayment
Equity in your company
Credit with which to acquire your goods or services.
Depending on the arrangement you agree to, the financing may not cover the entirety of the purchase. In that case, you’ll be asked to make a downpayment.
Types Of Vendor Financing
The term “vendor financing” encompasses a number of different arrangments a vendor can make with a small business. The three most common are:
If your vendor is extending debt financing, they’re essentially offering you a loan. But instead of receiving a lump sum of cash, you’ll receive the goods or services agreed upon. In many cases, the vendor will only finance a percentage of the cost of their item, which means you’ll have to produce a downpayment of some kind.
From here, debt financing looks a lot like a loan. You’ll work out a payment schedule with your vendor, as well as an interest rate–if your vendor wants to make the sale badly enough, there may not be one, but don’t count on it–and put up any collateral necessary. If you’re acquiring a tangible item, debt financing might resemble an equipment loan, with the item serving as collateral.
Whether or not this is a good deal for your business will depend on the terms agreed upon, especially in comparison to any loans you may qualify for. Mature businesses looking for vendor financing will probably prefer debt financing to equity financing since it has fewer long-term repercussions on your operations.
Vendor financing doesn’t necessarily involve taking on debt. In some cases, a vendor may offer your goods or services in exchange for a share of equity in your company. The vendor then becomes a shareholder, receiving dividends and participating in your business decisions.
In most cases, a business that agrees to equity financing will be a startup that doesn’t have the credit or history to qualify for other types of financing. Since you’re involving outside entities in your business operations, you’ll need to factor that into your business plans and risk assessments.
In less common cases, a vendor may be willing to trade their product for one of your own of similar value. These types of agreements are much more likely to be informal and between companies that already have a strong working relationship.
Vendor Financing Pros & Cons
So what are the pro and cons of using vendor financing?
You Can Bypass Financial Institutions Entirely: If you don’t match the profile of a good borrower, it can be difficult to get the money you need to buy inventory, equipment, or vital services. Vendor financing allows you to plead your case directly to the company you’d be spending your money with.
Startups Can Get Important Items: Startup financing is one of the great stumbling blocks when you’re starting a business. Without a business history, lenders may not want to take a risk on you. Equity financing gets around this Catch-22.
It Helps Vendors Make Sales: While “giving away” a product with an IOU may carry some risk, a deferred payment still allows a company to move inventory it may not otherwise have been able to.
You’re Limited To What The Vendor Sells: Vendor financing is only good at the company that you’re petitioning. With a working capital loan, for example, you can split your lump sum between multiple expenses.
It’s Not That Common: If you’re counting on vendor financing, you’ll likely end up constrained in terms of your choice of vendors.
It Exposes Both The Vendor & Buyer To Risk: Neither company is a bank. Vendor financing adds complexity to what would otherwise be a pretty simple retail transaction. The vendor needs to have a plan for if the buyer defaults. The buyer needs to read the fine print and make sure they have recourse under state law if they’re unable to fulfill the terms of the agreement.
When To Use Vendor Financing
If you’re considering debt financing, it’s probably because you have a strong working relationship with the vendor in question. Trust is the name of the game here, so being a reliable, valued customer will come in handy. Whether or not it’s a good deal relative to an equivalent loan will depend on the terms you’re offered, though it’s quite possible that you can end up spending less than you would servicing a traditional loan.
When it comes to equity financing, you’re looking at a more specific niche. Startups willing to part with some of their equity to obtain necessary equipment may find it easier to cope with than taking on personal debt.
Finally, any two businesses that are comfortable with the arrangement may be happy to swap services.
Final Thoughts On Vendor Financing
Vendor financing is a quirky but legitimate way to get your business the inventory, equipment, or services it needs, so long as you approach the matter with a clear idea about its perks and drawbacks.
For other ways to get vendors to finance their own products, you may want to read up on captive lessors.
Looking for forms of financing that don’t involve taking out a loan? Read The Merchant’s Guide To Invoice Factoring.Â Have a startup and need financing, but aren’t sure you want to give up equity right now? Find out how toÂ Get The Equipment You Need For Your Startup Business With A Loan Or Lease.
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