Being able to invest in new machinery and equipment can be the boost your business needs to grow and compete in new markets. But upgrading, replacing, and buying new machinery outright can be expensive.
A considerable outlay on new or even second-hand machinery can significantly impact working capital and stretch your finances. That’s why many businesses use equipment finance to fund the purchase of the machinery and equipment they need.
In 2018, leasing and Equipment Finance accounted for 40% of equipment capital expenditure in Australia.
If you’re looking to fund the purchase of new machinery, this guide will help you understand your options and what to look for in an Equipment Finance facility.
Types of Machinery Finance
Even if you don’t qualify for a bank loan or overdraft, you will likely be eligible for Equipment Finance. Funding providers generally use the value of the machinery you want to buy as collateral for the financing facility. That means Equipment Finance is much more accessible than traditional funding methods, and solutions are flexible and can be tailored to your business’s needs.
There are three main types of machinery finance, including:
Chattel Mortgage
A chattel mortgage is a financing arrangement that allows a business to get a loan from a funding provider to purchase the machinery they need. The chattel (machinery) is used as collateral to secure the finance.
Over the agreed financing period, the business makes regular repayments to the funding provider until the loan and interest are repaid. With a chattel mortgage, the ownership of the machinery is transferred to the business directly after the purchase.
Hire Purchase
A hire purchase solution is when the funding provider agrees to purchase the machinery that the business needs. The machinery is then hired to the company over a set contract term. The business makes regular repayments for the contract duration.
The business can use the machinery immediately and takes ownership when the final repayment has been made.
Finance Lease
A finance lease is a funding solution that allows businesses to access the machinery they need with no upfront payment. Similar to hire purchase, the funding provider purchases the machinery for the company to use. The business then makes regular repayments over a set contract length.
At the end of the contract, the business can purchase the machinery for a nominal fee, give the equipment back, or continue to lease the machinery from the funding provider.
Is Security Required?
No. For the vast majority of Equipment Finance arrangements, the machinery being purchased acts as security for the funding. You don’t need to use your home or property as security. If you default on the repayments, the machinery may be repossessed by the lender to cover the purchase cost.
You can use Equipment Finance to fund up to 100% of the cost of an asset. Depending on the terms of the arrangement, you may be able to reduce the monthly repayment and interest charges by providing an upfront deposit.
How to Work Out Your Budget
It’s essential to set a budget and know what you can afford before seeking finance. Your equipment budget will depend on the size of your business and the specific machinery you need.
The first step is to contact suppliers and get pricing quotes. You’ll also need to account for the costs of repairs and maintenance. The supplier or the finance provider may cover these expenses, but it’s helpful to know these costs when setting your budget.
You can also use Equipment Finance to fund the purchase of second-hand machinery. When you’re working out your budget, consider whether you need a new piece of machinery or whether a second-hand option can provide what you need at a more affordable price.
Prepare Your Business Information
Before applying for machinery finance, prepare your business information and ensure that your financial records are up to date. The application process will be much faster and smoother if you have this information to hand.
Generally, the finance provider may want to see information that proves your business’s financial strength, including bank statements and cash flow forecasts.
Read our guide on creating a cash flow forecast to help you determine how much you can afford in repayments and how new machinery could improve your capacity and profitability.
The finance provider will also want to see a supplier quote for the equipment you wish to purchase.
Sorting out this information before you apply for finance can help the application process progress quickly and demonstrate to the funding provider that you understand your business needs.
Interest Rates
When you’re evaluating Equipment Finance quotes, the interest rate should be one of your key considerations. The interest rate will make a significant impact on the total cost you pay for the machinery.
Finding a finance provider that offers a low-interest rate should be a priority. Get Equipment Finance quotes from several providers to see how the interest rates compare before entering into a financing agreement.
Tax Benefits
Depending on the type of machinery finance you choose, you may be able to get tax benefits that reduce your taxable income.
You may be able to claim the monthly repayment and interest charges as a tax deduction. For some financing arrangements, you may also be able to claim the depreciation value of the machinery up to the maximum limit set by the Australian Taxation Office.
Your tax advisor or accountant should advise you which type of Equipment Finance will offer the most tax benefits and is the best fit for your business.
To find out more about how Equipment Finance could help your business, read our guide The Benefits of Equipment Finance.
Repayment Options
It’s important to work out the repayment terms you can afford before entering into an agreement. Once you have set out your budget, you can negotiate repayment terms that suit your business needs.
Equipment Finance terms can range from 24 to 60 months. Generally, the shorter the terms, the lower the amount you will pay in interest, but the higher your monthly repayments will be.
One of the most significant benefits of Equipment Finance is the ability to get the machinery and equipment you need without stretching working capital. You should negotiate repayment terms that allow you to pay back the sum owed without significantly disrupting liquidity.
Many businesses choose to make a lower monthly repayment with a balloon payment due at the end of the financing terms. A balloon payment is a lump sum due at the end of the contract to finalise the purchase of the equipment. This can allow for better cash flow management if your business is susceptible to seasonal sales or cash flow gaps.
Fees & Charges
Make sure you fully understand the terms and conditions of the equipment financing arrangement. You should establish what is included in the repayments and if there are any additional charges, such as account management and set up fees.
If you plan to pay down the finance before the end of the term, it’s also important to know if there are any early repayment charges.
ScotPac Machinery Finance
We provide a range of financing solutions to help businesses purchase the equipment they need to compete here in Australia and in international markets.
Our team of business finance specialists can put an Equipment Finance facility in place that gets you the machinery you need in less than 24 hours.
Use our simple online Equipment Finance enquiry form, or speak to our friendly team today and we’ll create a tailored solution for your business.