Equipment Financing – where do I start?
Equipment used within your businesses is usually the cogs that keep things rolling, in order for you to earn your income. But not every business has the means to just purchase at any time.
Occasionally a business must choose to finance some piece or pieces of equipment, vehicle, or other expensive items to keep a handle on the efficiencies and revenue potential of that business.
1/ Different types of financing – understanding the terms
i/ Hire Purchase
A fixed-term agreement where the lender buys the equipment for your business to use. Once final payment is made, you own the asset. You’ll be charged GST on the payments, fees and residual.
ii/ Finance Lease
A fixed-term rental agreement where the lender owns the asset but at the end of the lease term, you can make an offer to buy it.
iii/ Operating Lease
A fixed-term rental agreement where you rent the asset from your lender, who owns it. This is particularly popular for rapidly depreciating items like IT and medical equipment because there is more flexibility to update.
iv/ Equipment Loan
This kind of loan allows the business to own the asset. It effectively sits on your balance sheet and you may be able to claim depreciation and interest as a tax benefit.
If you take out an equipment loan, the finance provider lends you the funds to buy the asset and then takes a mortgage over it. You make payments over a term, typically between two to five years, depending on the equipment’s expected effective life.
You can opt for a residual or balloon payment, for example, they could defer 20% of the cost to the end of the term. This lowers regular payments but slightly increases the overall costs. We see businesses choosing this option when they are looking for a cash flow benefit, and they’re willing to pay for it.
2/ Questions to ask yourself – or ask your broker
There are many questions still to be answered before you make that financing decision.
Such questions may be:-
a/ Have I considered my competition, as to what are they doing or using in their business model? Will they become more efficient with a new purchase before you do?
b/ What are the potential tax benefits and after-tax costs? And are there additional costs other than interest?
c/ Can I structure my repayments to suit my cash flow?
These are just a sample of questions that require answers before a financing decision is made.
There are also many products with varying costs and charges involved, so speaking with your broker may highlight the many choices you have available to you. So why approach only one lender when your broker can show you many options. Makes good salad (sense), hey.LOL.
