09.09.2020

Subsidised dealer-based funding

When buying vehicles or machinery, the dealership will often offer finance for the machine. Headline interest rates are often competitive, and in many cases heavily subsidised. How this funding is structured means there are a few catches to be aware of.

To enable the finance agreement to be offered at a lower than market interest rate to buyers, the dealer will pay part of the interest component of the loan to the financier as a subsidy. This will be taken off the dealer margin when the machine is financed. As an estimate; for a $50,000 vehicle, with a 20% deposit, funded over four years, at a promotional rate of 2%, the subsidy would likely be around $3,000. For a $250,000 machine funded over the same terms, the subsidy would likely be as much as $15,000.    Ultimately, this is a cost the client is paying from the margin on the sale price of the machine. The buyer should be able to negotiate the subsidy amount off the purchase price of the machine when paying cash or funding elsewhere. 

While the dealer may create the loan under their own brand, this debt is usually underwritten by a bank or other financial institution under what is known as a “white label” solution. The loan obligation and repayments are usually paid directly – if unknowingly – to the finance company

Difficulties in dealer-based funding can arise when you want to renegotiate during the life of the loan, but have no relationship with the lender. Where the finance has been provided under the dealer’s brand, the actual financier is largely anonymous, other than in the fine print. This can make it tricky to negotiate with the lender for term extensions, partial releases of security, or other structural changes to the loan such as what we saw during the recent Covid-19 lockdown.

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

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