Expert advice - When to consider equipment finance and what to consider″
SYDNEY, Australia - March 24, 2014
If you are running a small to medium sized business, at some stage you will need to buy equipment and vehicles. Investing in latest technology, equipment, plant and machinery or maintaining your vehicles ensures your business remains competitive, efficient and free from frustrating and costly breakdowns. Sometimes business owners justify why they are using finance rather than paying cash for acquisitions. Apart from preaching to the converted, the misconception that a business could not be flourishing if it uses finance, could not be further from reality and in most cases financing makes the most economic sense.
So why not just pay cash?
The age old equipment finance adage is, “If it appreciates buy it, if it depreciates, lease it”.
So when should you consider equipment finance?
If your business is profitable?
If your business is making a profit, the deductions claimed on interest charges assist in reducing your overall tax you may have to pay. You can claim depreciation expense too, depending on what type of finance/leasing you choose
If you need to reduce your tax bill
If you need to manage tight cash flow
Cash is King! Hang on to your cash to assist with day to day operating expenses. When you use equipment finance, you just need to come up with the monthly payment rather than the full cost of the equipment. Being fixed interest and fixed term you know exactly what you will be paying each month for the term of your contract.
If your business is growing at a rapid rate
Ditto above again. If you have a rapidly growing business, you will need cash to cover day to day operations, such as increasing stock levels, increasing debtor levels and staffing to name a few.
You don’t need to use cash or provide other collateral security (such as your home or commercial property) to fund equipment. Equipment finance in most cases is a ‘standalone’ facility where the equipment is used as the lenders security. See more below on this.
If you have long term debt
Usually long term debt such as home and commercial property, or your business loan is going to cost you more than equipment finance even though the rate per annum may be higher on the equipment loan. The reason is simple; the larger the loan and the longer the term the more interest you will pay over time. If you want reduce interest you pay, put your cash down on these loans. The benefits of doing this is threefold: less interest you pay over time, interest you pay via equipment finance is tax deductible – your home loan isn’t, and what’s more, by increasing equity in your property you effectively open up a line of credit you can draw on for short term unforseen operating expenses, or for investment and growth opportunities
If you require an overdraft, line of credit, residential/commercial property finance or other business loans where additional security (i.e. bricks and mortar) is required
As mentioned above. By utilising equipment finance you can use cash for operating expenses in your business or for increasing equity in your properties. If you ever need any other type of finance facility (and most growing businesses use overdrafts, debtor and trade funding for example) your bank will be looking for extra security. Future investment in property is also possible when you increase equity in your existing property portfolio.
If the equipment is fundamental to your business’ capacity to earn income and you need to purchase equipment now
You can acquire equipment today for the amount of one monthly finance repayment rather than the entire upfront cost of the equipment.
The cost of financing will be offset by increased revenue earning capacity achieved through the purchase of latest equipment and of course any cost savings it achieves. There are also the often overlooked and undervalued benefits that new equipment brings to staff morale and the subsequent flow on of increased productivity and reduced staff turnover.
If capital expenditure budgets or bank covenants limit what you can purchase outright.
Rental and some leasing facilities are off balance sheet and may bring forward vital equipment acquisition
Summary of benefits
- Cash is king!! Utilising finance helps you hang on to it
- Reduce your tax bill
- Your home is not used to secure the loan
- Equity is retained in your home/commercial property enabling you to invest in assets that will increase in value over time
- Better Budget and cash flow management
- Enables you to buy equipment, software and vehicles that are vital to your business now, rather than waiting till it’s too late
If you are mulling over the purchase of new equipment you will no doubt have many things to consider:
Does the equipment do what I need it to do? Will it produce goods quicker, easier, better quality, more cheaply? Will purchasing the equipment open my business up to new streams of income, new markets? And importantly, Can I afford it?
Speaking with your accountant and a finance specialist may assist with the questions of whether you can afford to invest in equipment (or perhaps more aptly, if you can afford NOT to!)
Getting a finance quote will help you with your decision making. Don’t get caught in the trap of focusing on the outright purchase of the equipment. You may be surprised at how affordable monthly finance repayments may be and when you consider increased income and production efficiencies gained, the cost of finance soon becomes secondary.
For example, indicative monthly finance repayments on various $ amounts are shown below:
|Amount financed $||Monthly Payment *|
|*Indicative monthly payments based on 60 months, no balloon/residual|
Consider getting finance pre-approval
Knowing you have your funding in place may give you more confidence when negotiating on the purchase of your new equipment. It is also really useful for taking advantage of trade show specials, enabling you to buy on the spot with confidence.
Most lenders don’t charge you for getting a pre-approval in place and they normally last for up to 90 days. Don’t worry, you don’t need to provide specifics of the machine (just what type of machine it is) and the approximate purchase price (stick to the upper limit bearing in mind, the final finance contract will be based on your buy price, not on the dollar amount you had approved)
So where do I go?
There a many sources you can use these day for finance such as:
- The bank
- Vendor and in store finance
- Credit unions
- Finance brokers
Finance brokers are great options for small business equipment finance needs, as they offer one point of contact for a suite of funding types and sources.
What will I be asked to provide?
Getting finance is still very much a numbers game so you need to ensure you keep your financial statements up to date and in good order. Working closely with you accountant is essential and will also give the lender confidence that you have your finger on the pulse. How you run your business and the systems you have in place are also important.
Who was running the business, their experience in it and also in the industry at large certainly plays a big role. This along with the systems the business has in place to monitor and track performance daily indicates a business is run well.
How much equity is in the business, debt levels and the businesses’ ability to service it, and also sustainable growth are considered
Does the business have good relationships with clients and suppliers, do they have a business plan and are budgets available and well presented?
You will need to be able to present your story along with:
- Two years current financial statements prepared by an accountant (Profit and Loss and Balance sheet and/or tax return)
- Personal asset and liability statements for owners/directors of the business
- List of all current finance commitments
- More information including a current debtors and creditors listing may be required depending on the size of the loan and type of equipment being acquired
Lo- Doc (or no financial loans)
There are some lo-doc finance loans available for up to $100k for vehicles and $35k for plant and equipment. These are loans that do not require the presentation of financial statements and are approved based on certain criteria.
These criteria vary but normally require a business to be trading for a minimum of 2 years and require owners to be asset backed.
About the Author
Marian Taggart-Holland is a self-confessed tree hugging, small to medium business loving, financier. She is the director of Ecolease, an independent commercial finance broking firm, based in Sydney, and servicing SME’s Australia wide. She specialises in commercial asset finance for small to medium businesses, and has done so for the past 13 years.
“What I enjoy about my work is that I get to deal with a diverse range of people and businesses. Small business in particular is very dynamic and personal at the same time, and you need to have a basic understanding across the various business disciplines. It takes a certain person to run a small business, and I really enjoy working with those types!”
GJS is Australia’s premier provider of solutions and services for the textile, promotional products, custom photo gift, sign and display industries. With over 41 years’ experience, GJS supplies everything needed to start and operate a successful printing business including equipment, consumables, training and support. Headquartered in Revesby, NSW, and with additional teams located in Victoria and Queensland, GJS serves customers throughout Australia, New Zealand, and the Pacific Islands. For more information visit: gjs.co. GJS and the GJS logo are trademarks or registered trademarks of GJS. Other names are trademarks of their respective owners.