Why do Toolbox Manufacturers Charge High Interest Rates and Mechanics are willing to pay for them?
The high interest rates of toolbox financing provide benefits for the manufacturing
company and the mechanics. The company increases their net income and the
mechanic receives financing, convenience and the name brand.
We have all been there. We walk into the garage of our mechanic’s shop, taking a quick glance; we see the huge elaborate toolboxes that each mechanic owns. Most of them are from Mac, Matco or Snap-On. Unless you work in the tool industry most people do not realize what the real cost of each of these boxes is.
The average toolbox costs a minimum of $4,500 and can run up to $9,500 for just one component of the set. The Big Three toolbox companies in the industry are Mac, Matco and Snap-on and all are using outrageous interest rates depending on state requirements. The rates vary from 6.25% all the way up to 22.50% in most states.
So how much does that toolbox really cost if a mechanic makes weekly payment for the whole term of the contract? A $4,500 dollar contract as the
principle balance at 22.50% interest while paying $32.71 a week for 208 weeks (4 years) will cost a total amount of $6,803.68. That is over $2,000.00 in
interest. Looking at a $9,500 dollar contract at 22.50% interest while paying $69.06 a week for 208 weeks, will cost a total amount of $14,364.48. That is almost
$5,000.00 in interest!
Looking at this scenario from a company’s
perspective, there has to be a point of
competitiveness. Each manufacturer offers in-house
financing for mechanics that are interested in buying
their product. Due to many mechanics having little or
damaged credit, the companies are taking a financial risk by financing them. Considering that for
every 100 contracts the company buys 2 will default on the loan. There is a 2% chance of default
on a loan. Each company buys 300 contracts on average per day, approximately 78,000
contracts annually which means that 1,500 will more than likely default. The rate of interest on
the company’s part is determined by an estimate of how much money will be lost.
If the interest income from these rates makes up approximately 35% of each company’s net
income, then the total amount of interest income would be 37% from these contracts.
1
For the
company, the benefit of bringing in a 35% net income outweighs the cost of a 2% loss of interest
income.
The other point of view, the mechanic’s, involves three solutions to this question.
These ratios can be used to determine the most desirable company to grant a loan to between Wendy’s and Bob Evans. Wendy’s has a debt to assets ratio of 34.93% while Bob Evans is 43.68%. When it comes to debt to asset ratios, the company with the lower percentage has the lowest risk. Therefore, Wendy’s is more desirable than Bob Evans. In the area of debt to equity ratios, Wendy’s comes in at 84.31% while Bob Evans comes in at 118.71%. Like debt to assets, a low debt to equity ratio indicates less risk in a company. Again, Wendy’s is the less risky company. Finally, Wendy’s has a times interest earned ratio of 4.86 while Bob Evans owns a 3.78. Unlike the previous two ratios, times interest earned ratio is measured on a scale of 1 to 5. The closer the ratio is to 5, the less risky a company is. From the view of a banker, any ratio over 2.5 is an acceptable risk. Both companies are an acceptable risk, however, Wendy’s is once again more desirable. Based on these findings, Wendy’s is the better choice for banks to loan money to because of the lower level of
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Assessing the capital structure of any firm is important for investors attempting to determine if...
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