By Paul Jermain, Instructor, Entrepreneurial Training Program, www.entrepreneurialtrainingprogram.com
Recently, I was talking to Cathy, an entrepreneur in the auto-hauling business, about a big rig purchase that went very badly. The conversation unearthed a number of points that are important for any entrepreneur considering buying expensive capital equipment.
Loan Principle Amounts, Interest Rates, and Terms Make A Big Difference
Now, it is obvious to most people that large principle amounts, high interest rates, and short payback periods typically lead to significant monthly payments and higher overall payoff amounts. But, it’s easy to overlook those facts in the heat of the financing moment. In Cathy’s case, she was accustomed to making purchases of vehicles in the $13,000 range, with 7% interest rates, and felt comfortable with the resulting $250 monthly payments. Unfortunately, the auto-hauling truck loan principle was $19,500, the interest rate, a breathtaking 37%, and the term 36 months, which resulted in monthly payments of $820, an entirely different league. The payments put her under huge financial stress and almost led to repossession of the truck several times throughout the loan period. When approaching the final loan payments, Cathy’s heart almost gave out when she learned that, over the loan term, she had paid out $18,000 in principal and $10,000 in interest!
Consider All Costs, Not Just Financing Costs
In addition to the financing factors, other unanticipated costs came with the purchase which made a bad situation worse. The commercial insurance rates associated with the big rig were multiples higher than the personal vehicle insurance rates that Cathy and her business partner were accustomed to. And rolling down the road, the truck incurred expenses such as repairs, tolls, taxes, and fees which added to the financial pressure of the high monthly payments.
Know The Character Of Your Business Partners
Cathy estimated that the working truck would cover its own expenses, plus some, based on good solid business agreements and continuous commercial operation, which was certainly a valid assumption. Unfortunately, Cathy did not invest sufficient time to locate good partners and ended up with a high cost “last resort” financing supplier and a driver that was more interested in taking long vacations than in driving the big rig down the road.
Be Clear About Expectations, Write Them Down, And Protect Yourself Overall
The initial “back of the envelope” deal was for the Cathy’s partner to purchase the big rig, and the pair to share the truck financing payments, and profits, equally. When her partner’s loan application was turned down, Cathy agreed to co-sign for the note, with the verbal assurance from her partner that there would be no payment issues. As it played out, Cathy ended up making 26 of the 36 payments, many of them at the last minute, to deal with her partner’s financial absence. With no written outline of who was responsible for what, and the consequences of non-performance, Cathy was forced to “grin and bear it” to avoid losing her investment. Cathy made the payments with virtually no assurance that she would ever see the truck again, as the truck and partner were remotely located, and Cathy did not have a clear path to the truck title, resulting in a highly vulnerable personal position.
As you can tell, Cathy learned a lot from this experience. In retrospect, many of the mistakes seem to be obvious bad moves that could have been easily avoided. But, hindsight is 20-20. Think of all the people you know that have made significant purchases- houses, cars, land, etc., only to be tripped up by the same errors. Cathy, fortunately, survived her mistakes and is moving forward with her business. Do yourself a favor, learn from her mistakes, and move forward with yours too.