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To Pre-fund or Not to Pre-fund?

From a customer’s perspective, the single most important part of any financing transaction is the part where the finance company cuts the final check. In commercial equipment financing, this culmination takes place when we send a wire or check to the vendor or private party our customer is buying their equipment or vehicle from. Unfortunately, this is the part of the transaction where companies like ours get especially cautious.

When monies go directly to a customer, as is the case with most direct-to-consumer lending, the customer can usually go trade their money for the goods they want to purchase. In our industry, conversely, there is some risk associated with paying the vendor. For starters, once monies go to the vendor, there are no guarantees regarding receipt of title or equipment in a timely fashion, or in some cases, at all. Pre-funding: it’s what we call paying a vendor or private party before a customer has received their equipment. In some transactions it’s unavoidable.

Recently, for example, we had to wire funds to a vendor a few states away because our customer wasn’t going to make it to the dealership before the wire cutoff and would have had to spend the night in another state if we missed the deadline. In most cases, however, we try to simply avoid pre-funding at all. It’s not simply a matter of protecting ourselves, though. We prefer to keep the best interests of our customers at heart, as well.

If we pay for equipment and the customer has signed a lease agreement with us, they are obligated to begin making their payments the following month. That means, even if the equipment isn’t what it was purported to be–even if the title is a salvage or there are substantial damages or the equipment isn’t ready for use (which are all situations we’ve encountered)–the customer is liable to our contract. If we don’t do our due diligence and protect our side of the transaction, our customer could be put in a bad spot which could promote ill will.

In a private party transaction, paying the individual before delivery of the equipment can be disastrous, too. If a seller misrepresents a title as free and clear when it has a lien on it, or “forgets” to mention a serious defect, it could leave few options apart from legal action, and that could take some time to work out. There is almost no way to get money back in a timely fashion once it’s paid out. Money is, after all, the ultimate leverage in a financial transaction. Holding the money gives you the power to ensure the transaction is completed as promised. In our case, it protects our interest as the lessor of the equipment, and it protects our customer’s interest as the buyer.

Pre-funding transactions is a common practice for some of our competitors. In fact, many of them won’t even think twice before writing a check or sending out a wire. We, like others in the industry, do find ourselves in situations where pre-funding is a requirement to complete the transaction. In those cases, we secure many layers of protection. We get a Bill of Sale signed, we ask for copies of the title signed off, we ask for a copy of the bond for a dealership. These are just some of the ways we equalize the ‘playing field’ in a transaction. In the end, the truth is, we never feel totally okay about pre-funding.

So, while we can’t entirely escape the perils of pre-funding, we have made it our goal to educate our customers about just why we’re so cautious about sending out the money before they have the equipment. Pre-funds are easy to make happen, refunds on the other hand, are hard to come by. There is a right way to do a transaction and a wrong way, and no legitimate vendor or seller will ever balk at a fair arrangement that allows you to trade payment for equipment in person. This is also a reason a lot of our customers prefer to deal with vendors they can visit in person. Hopefully, knowing the risks will make you think twice the next time the vendor is breathing down your throat to get paid before you get your equipment.