Setting up equipment for a new practice, purchasing a tractor, buying a coffee machine for your restaurant or even a new car can cause some businesses financial woes. Before you make any purchases, you need to understand what finance option may work best.
How long should you commit to financing?
If you want your finance to work for you rather than against you, make sure your finance period matches the lifespan of your equipment. There is no point taking out a loan for five years if you will need to upgrade the equipment again in three years’ time.
Get your end of term lump sum payment right
This is often referred to as a “balloon” or “residual” and can reduce your monthly repayment, but also increases the interest payable over the term of the finance. This amount is set out when you first sign up for your loan. Some loans may have no balloon. Others may have as much as 25 percent. The balloon amount should match the real market value of your vehicle or equipment at the end of your loan term; that way you are in a better position to negotiate a reasonable trade-in price or to refinance if need be.
Remember to think about your cash flow
Buying new vehicles or equipment can have a real impact on your cash flow. It’s important to make sure your financial provider can assist you by providing flexible payment terms. Every business is different and it’s often possible to structure your payments to suit your existing cash flow constraints, so don’t be afraid to speak up and discuss your unique circumstances with your lender.
Ideally, you want to optimise the value of your purchased equipment to help your business grow and meet your cash flow requirements without compromising long-term profit.
Don’t be afraid to ask questions regarding your payment and investment terms, some possible things to consider:
- What is the monthly loan repayment including all fees and charges?
- Will this investment generate a return? If so, how long will it take?
- What is the true total cost of the vehicle or equipment, including expenses such as installation and delivery?
You’ve done your homework and now it’s time to buy.
You’ve done your homework and now it’s time to buy. When it comes to purchasing equipment, if you’d prefer not to use cash there are three main options; equipment loan, leasing and hire purchase.
This is considered by most to be the simplest form of equipment finance and is also easily the most popular.
When you enter into an Equipment Loan, you own the vehicle or equipment and your finance company loans you the money to purchase it. The finance company takes a mortgage over the vehicle or equipment which is used as security for the loan. Once the loan is paid off in full (plus the balloon payment if you have requested one) the mortgage is finalised.
To lease or not to lease
Much like you lease property or a car, when you lease equipment, your finance company maintains ownership of the equipment and agrees to your business using it for a certain term. At the end of the term, you may be able to make an offer to purchase the equipment.
Hire purchase – an old-school way to buy
In post war Australia, hire purchase was a popular way to finance big ticket items – but that’s no reason for Gen Y or Millenials to discard it. When you enter into a hire purchase agreement the finance company initially owns the vehicle or equipment and you purchase it progressively over a fixed term. At the end of the term, after making your final payment (plus the balloon payment if you have requested one), the vehicle or equipment is yours.
Each loan type has different tax and GST implications and benefits so it’s important to get the right advice from a trusted source who knows your business, like an accountant.
The information provided in this article is intended to be of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on the information in this article, National Australia Bank Limited (ABN 12 004 044 937, AFSL and Australian Credit License 230686) (NAB) recommends you consider whether it is appropriate for your objectives, financial situation and needs. NAB recommends that you seek independent advice before acting on any information in this article.
To find out more visit nab.com.au/business/loans-and-finance/vehicle-or-equipment