Cash vs financing – this is one of the most important decisions that you, as a business owner, must take when considering your next equipment purchase. Now if you can afford it and have the cash available, you can purchase the equipment outright.
However, I would advise you to take a step back to ponder over a few things. Any type of commercial loan, including heavy equipment financing, comes with its own set of advantages such as improved cash flow, great tax savings, flexible repayment options including balloon payments, and desired loan terms.
So What Is Equipment Finance & Why Should You Consider It?
Going with the right equipment financing alternative can act as the major differentiator between business survival and bankruptcy. It enables you to buy new equipment without emptying your cash reserves. It is, in fact, very important for new businesses.
Before proceeding further, take a look at this report from Australian Bureau of Statistics:
They state, “As of June 30 2016, the number of actively trading businesses in the market sector was 2,171,544, an increase of 2.4% from 30 June 2015. From 2014-15 to 2015-16 there was a moderate increase in the business entry rate (from 13.4% to 14.6%) and a small decrease in business exit rate (from 12.4% to 12.3%)”.
With a large number of businesses scattered across Australia and their steady rise, the need for new equipment in each sector has also increased. Therefore, you must realise the increasing importance of equipment financing.
What Are The Benefits Of Heavy Equipment Financing?
1. Cash Savings
If you are a new business in the market, buying each piece of equipment with cash could deplete your capital. In order to protect your cash reserves, you can depend on equipment financing, so that your money stays where it belongs.
Recent market statistics reveal that organisations, especially small and micro businesses, heavily rely on finance providers to purchase equipment for their ventures. The percentage of equipment financing as compared to total borrowing amounts to more than 34% for micro businesses and over 27% for SMEs.
2. Payment Flexibility
Cash flow plays an important role in your business. When you choose any heavy equipment financing package, you need to budget your cash flow and schedule repayments accordingly. You can consult your lender to plan your instalments in the months when your business makes maximum sales, e.g. seasonal payments for a farmer and their harvest
3. Smooth Business Cycle
Due to repayment flexibility, your business cycle has an uninterrupted flow. For example, during months of lower sales, you can make lower repayments. Accordingly, during months of higher sales, you can ensure higher instalments.
4. Professional Consultation
Did you know?
Now, when you go for equipment finance, you can get professional advice from experts as to which option suits you best. This much-needed helping hand, particularly from brokers, enables you to gauge the usefulness and efficiency of different financing programs.
What Are The Various Types Of Key Equipment Financing?
There are various types of key equipment financing options available. Some of the few notable ones are heavy equipment financing, truck financing, excavator financing, trailer financing, and plane financing.
You can also choose from three types of loan products – chattel mortgage, hire purchase, and finance lease.
To decide which option suits you best, I shall give you a gist of each:
1. Chattel Mortgage
Chattel mortgage has been designed mainly for business purposes. Here, a financial lender shall offer a loan to the client with a mortgage over your equipment (chattel) as security. You will own the vehicle at the time of purchase in exchange for regular repayments. The mortgage is taken through fixed and floating charges verified by Australian Securities and Investments Commission (ASIC).
Once your loan tenure is over – including all instalments, along with any residual payment – you will get the complete ownership of the equipment. You can also choose to trade in your equipment or refinance the balloon amount.
2. Hire Purchase
As the name suggests, in commercial hire purchase or hire purchase, you can hire equipment from a financier for a certain term – with fixed instalments over that period. Under this arrangement, your lender purchases the equipment on your behalf and lets you hire it. You can use the equipment, but you don’t have the rights of ownership. When the hire period is over, and you have cleared the entire repayments, you can own the equipment.
3. Finance Lease
A finance lease is carried out between two parties – you, the user or lessee, and the equipment owner or lessor. After signing a periodic payment agreement, termed lease rentals, a lessor transfers you the rights to use the equipment. But the entire ownership still lies with your lessor. However, you can discuss with them about the flexibility of instalments that shall suit the financial limitations of both parties.
There are various factors to consider when choosing from these three options. Some important ones are as follows:
1. What Is Your Type Of Business?
Chattel mortgage: If you are a company, partnership, or sole trader who uses the cash method of accounting, go for chattel mortgage. Cash method of accounting means that you record your income and expenses according to the time of occurrence. You can then claim GST in the vehicle’s price upfront.
Hire purchase: If you are a company, partnership, or sole trader who calculates GST as accruals or on cash basis, then go for commercial hire purchase.
Finance lease: If you are a company, partnership, individual, or sole trader who uses the equipment for generating income, go for finance lease.
2. Consider Your Tax Benefits
Therefore, in all three types of financing options, you are eligible for tax deduction when you use the equipment for commercial purposes.
In chattel mortgage, you can claim GST as an input credit on your next Business Activity Statement (BAS). No GST would be charged on your monthly instalments or residual value.
In hire purchase, GST is not applicable on your monthly rental and balloon amounts. You can claim GST on vehicle price, fees, and interest.
In finance lease, you are better equipped to schedule your advance lease payments for tax deduction or cash-flow improvement.
I have detailed it all for you – key equipment financing, its benefits, why you should consider it, and what type is suitable for you. Depending on your type of business and the desirable tax benefits, you can do some more research to arrive at the best financial option.
So, are you thinking of starting a new venture? Are your equipment options sorted? Have you settled on any heavy equipment financing alternative yet? If not, do consider my suggestions. All the best!
Please always seek tax advice from your accountant before entering any financial product