BTS 19: Nine Fast Facts about Equipment Finance

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Here are nine quick facts you need to know about equipment finance, according to Finlease CEO and founder Mark O’Donoghue

BTS 19: Nine Fast Facts about Equipment Finance
Finlease has 25 years' experience of financing equipment for capital-intensive industries

 

AFTER 25 YEARS of financing equipment for capital intensive industries, we thought we would share a few facts which will assist business owners in getting this area right.

1 Interest rates can vary by as much as 2 per cent, so it pays to shop around

Unlike home loans, interest rates on equipment finance are very much open to the competition of a free market and as such can often be negotiated down by as much as 2 per cent if sufficient competition is created between financiers.

A 2 per cent saving on a $300,000 loan over five years will save you $336 a month ($4,320 Vs $4,656), which over 60 months is $20,160. If your company runs at a 10 per cent margin, that saving is equal to an extra $200,000 in top-line income.

If your truck or trailer finance does not deliver an interest-rate in the 4.75 to 5.25 per cent range it may be time to shop around.


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2 The only hard security needed is the asset itself, so don’t fall into the bank trap

The only hard security for equipment finance should be the equipment itself. Where a client uses their own bank for equipment finance, there is a good chance that this loan will be secured (cross collateralised) against other assets including real estate. See the Blog section of the Finlease website ‘Getting equipment finance right’.

3 Spreading your equipment debt across several financiers provides many bonuses

Equipment finance allows a company to spread a greater portion of the overall debt to a broader base of financiers which means less exposure to their existing bank, greater competition between financiers to drive lower interest rates, often better approval conditions and a broader base of competitive lenders to assist in financing future growth.

4 The market has changed with many financiers no longer needing financials to provide finance approvals

Many financiers have switched to ‘behavioural’ credit assessment instead of looking at historic financial information to approve transactions. If a company has been in existence for two years, has a clean credit history and the principal is a property owner (20 per cent deposit needed for non-property owners), approvals are automatic for up to $150,000 on vehicles and selected plant and $500,000 to $1.5 million where it is a replacement requirement (provided the new payments are no more than 35 per cent higher than the loan/s they are replacing. The interest rates are just the same as for normal "fully assessed transactions".

5 Thinking about equipment finance the same way as a credit card limit has its benefits

Just as in the same manner as you are approved for a ‘limit’ on your credit card, pre-approved bulk facilities for equipment finance can be set up in advance across several financiers and at no cost, making it easier for companies to acquire additional machinery at short notice without having to seek finance approvals in each instance. Facility limits which can be set up for amounts from $200,000 to $3 million and are simply reviewed every year at the time the client has updated financial information.

6 Used equipment is as easy to finance as new equipment

Quality used equipment (which is often substantially cheaper than new gear) can have finance arranged just as easily as new equipment and so presents as an excellent alternative to new equipment.

7 Private sales can definitely be financed and a lot of money saved

Competitive equipment finance is easily available where the used equipment is being purchased from a private vendor. These private sale equipment finance arrangements do need a couple of additional steps performed, however the savings can be significant compared to new machines or used machines through a dealer. The extra steps are simply an inspection of the goods and a more rigorous PPSR regime to ensure clear title is passed onto the financier.

8 Financing GST is cheaper debt than an overdraft

GST can in most instances be financed as a part of the equipment finance facility if required by the client and in doing so provide what is in essence a very low cost working capital debt which is substantially cheaper than traditional overdraft rates. In the event that the customer does not want to finance the GST long term, however does not want to pay for it out of cash flow at the time of purchase, an extra payment can be made at month four of the transaction to coincide with the period where the client has the cash from their subsequent BAS refund.

9 If you turn over less than $10 million, you may be able to substantially increase your depreciation expenses

With the recent changes to the classification of small business from $2 million to $10 million in annual turnover, many larger businesses can now access Small Business Depreciation Pooling Provisions, which not only provides an option to claim an overall depreciation rate of 30 per cent diminishing value (DV), it also allows an ability to offset any profit on sale of assets. See the blog section of the Finlease website for more information on Accelerated Depreciation and Pooling Offsets.

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