Equipment Finance Overview
With many items of metalworking machinery available in what would be considered a ‘significant’ price range, most business owners will require machinery finance for that asset acquisition. Finance is available for all types of business equipment for all sized businesses – SMEs, sole trader, partnerships and large corporates – from a number of sources. But to be active in your business, to keep it running at optimum capacity, you will be wanting equipment loans that actually work for you. A finance deal that is customised to your cash flow, your financial objectives and your business structure.
While numerous financial institutions may offer machinery finance, they don’t all offer tailored machinery finance.
To assist you in sourcing the best loan for your equipment acquisition, we’re covering off on what’s available, explainers of key terms and hints on where to source the best metalworking machinery finance.
Types of Equipment Loans Available
Business equipment finance comes under the category of commercial finance products or facilities.
There are 3 main types of equipment finance available:-
- Equipment Chattel Mortgage: this is the most commonly-used type finance.
- Equipment Leasing: an off-balance type of loan.
- Equipment Commercial Hire Purchase (CHP): popularly used and features a balloon.
The similarities across the different types of equipment loans include:
- Fixed interest rate for the term of the loan for certainty
- Fixed monthly payments to support your cash flow
- Fixed loan term to assist long term business planning
- Balloon or residual is an option: this is payable at the end of the loan term.
- Available for both new and used equipment purchases
The differences across the different in loan types relate to the treatment of GST, tax deductibility of the various elements of the loan, ie interest, repayment, fees, balance sheet entry and the suitability for either the cash accounting method or the accruals accounting method.
To make the decision as to which is the most suitable equipment finance type for your business requires consideration of the accounting method you implement, your cash flow projections and financial objectives. It is always advisable to consult with your accountant for a professional assessment and to advise you with your decision.
Machinery Finance Interest Rates
Interest rates are a major factor in any loan and especially important in business equipment finance. The rate is the key determinant as to how much the loan will cost you in total over the term and this can impact your cash flow.
Business finance rates are usually lower than consumer interest rates. So if you are reviewing rates at various sources, make sure you are looking at the correct figures. Rates also vary across different categories of goods, ie business vehicles, marine vessels and for different types of equipment.
Interest rates vary from lender to lender based on their capacity to source their own funds; their level of activity and interest in a sector, for instance your particular metalworking area; how they assess the risk of individual sectors and individual businesses; and global financial markets.
While the interest rate is a key factor in determining a loan, an advertisement for ‘low interest rate loans’ may conceal a low with higher fees. It is always advisable to compare loans on the entirety of all costs and fees and with weighing up the terms and conditions offered by individual lenders. It’s all good to get a low interest rate, but if the lender insists on a shorter loan term which translates to a monthly repayment which is not achievable for your cash flow, then perhaps it’s not the best option for your business.
Best Sources for Equipment Finance
Machinery finance is available through a number of sources, primarily banks, finance companies and finance brokers.
Most banks, including the big 4 in Australia, offer equipment finance. A quick browse of each bank’s website and you’ll see the section and see what terms etc they are offering. Often they have maximum loan amounts which may be below the purchase price of your equipment. They also often have strict lending guidelines which you must adhere to.
A selection of finance companies offer machinery finance in Australia and publicly advertise their offerings in this space. Many of the large institutions which offer both consumer and business finance will have as strict conditions etc as banks.
Finance brokers offer savvy business operators with a very attractive alternative to sourcing all their business finance requirements. While the best ones are accredited with all the major banks and finance companies that you too can access directly, they also have ‘industry-only’ sources. These sources can many times be the key to getting the equipment loan that is truly tailored to your specific requirements.
Selecting a Finance Broker
The services of finance brokers are available to both individuals and all types of businesses but they key is to engage one that is suited to your needs. Most importantly, ensure that your finance broker specialises in equipment finance and has specialty experience and expertise in your metalworking sector. The mortgage broker that arranged your home loan may not have any experience in arranging equipment loans!
Also check their credentials to ensure the broker is fully compliant and licensed under the ASIC responsible lending guidelines. Importantly, the broker should be independent and not associated with any bank or finance company. This means they will be working in your best interests, not with the main aim of deriving profits for shareholders.
If you have specific reasons for wanting your bank to provide your finance, ask the broker if they are willing to negotiate your deal with your bank. The best brokers have highly honed negotiating skills and strong bargaining power so they are well-placed to get you the cheapest interest rates and best loan conditions.
Most finance deals can be arranged via email and phone so you don’t necessarily have to be working with a broker in your area. Finding the best broker and establishing a great working relationship with them, can be critical to your business success.
We know finance brokers with specific equipment finance experience. They have the contacts, expertise and skills to source great machinery finance deals. Please contact us for their details.