The Small Owner's Definitive Guide To Equipment Finance
Small businesses can always benefit from an upgrade to existing equipment or from purchasing the very latest technology or machinery. However, the reality is that many business owners simply don't have enough working capital to consider an outright purchase - making equipment finance an advantageous option.
Even if you can afford to invest significant cash into new assets, you are likely to be left with less capital to finance regular operations and explore new growth opportunities.
According to the Commercial Asset Finance Brokers Association of Australia (CAFBA), the asset finance market in Australia is worth $100 billion in receivables, at any given time, and around $40 billion in new equipment loans are written each year. 1
What are the most common types of equipment finance?
In short, vehicle and equipment financing enable you to purchase vehicles, machinery, office equipment and other requirements for your business on either a lease or rental basis. There are several options available for funding your business needs:
A vehicle and equipment loan is the option chosen by most businesses to purchase equipment, and comprises 78 per cent of the finance market. Throughout the loan, your business owns the asset, and the bank uses it as security, in case you default on your repayments.
An alternative option to an equipment loan is taking out an equipment finance lease, where the bank or lender would own the equipment and rent it to the business for an agreed term at a fixed rental rate. Once the agreed term expires, you have the option to return the equipment, refinance the equipment or purchase it outright.
Opting for a hire purchase loan means the bank or lender owns the equipment and you make repayments on it until the end of the term, when the ownership transfers over to you. You may also want to prepare a cash flow forecast with your accountant. Furthermore, NAB's Cash Flow Improvement Calculator with your accountant may help determine if and where adjustments should be made to ensure your business' financial health. The world of equipment finance can be tricky to navigate, so read on for a list of the top five questions every small business owner should ask themselves before taking out equipment finance.
Depending on which loan structure you choose, tax implications may apply, so it's important to talk to your accountant or financial adviser about any business lending and your specific financial circumstances.
Knowing how your business' bottom line will be impacted when you take out equipment finance is important; however, this can be difficult if your business is affected by seasonal cash flow fluctuations. Tools like NAB's Equipment Finance Repayment Calculator can be helpful in this scenario, and many finance providers now offer the opportunity to match repayments to periods of higher cash flow.
Is an equipment loan or an equipment lease right for me?
Choosing the best way to pay for equipment can depend on the expected productive life of an asset. If you will need an update after a relatively short period of time, leasing equipment might be the better option. This way you avoid having to finish paying off an asset that is now obsolete, which can put stress on cash flow. If the equipment is likely to generate value for a long period, an equipment loan may suit you better.
Should I use a broker?
In addition to helping you with the equipment loan application process, finance brokers also have access to a wide range of lenders and finance products, helping you secure the most competitive interest rates, and can advise you on which option that works for your business. Research by East and Partners shows broker-sourced equipment figures have increased, on average, from 58.4 per cent to 70 per cent in the last decade. 2
Who is responsible for the equipment during the finance period?
Establish from the outset of the agreement who is responsible for maintenance, repair and replacement of the equipment during the finance period. If damage or fault occurs, you don't want to get caught out with unexpected costs.
Are there establishment fees involved?
Establishment fees can easily run into the hundreds, so it is important to be aware if there are any when you are deciding which finance option is right for you.
What happens at the end of the finance period?
Before signing an agreement, it is important you understand what happens at the end of the finance period, as scenarios can vary depending on the finance option you choose. For example, if you are leasing the equipment, once the agreed term expires, you have the option to return the equipment, refinance the equipment or purchase it outright.
1.CAFBA, Annual Review, 2016-2017
2.East & Partners Asia, New Growth Driven 'Bottom Up' by Equipment Finance, 2018
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