Equipment Finance: Your Equipment Finance Question Answered

Introduction

If you're in the market for new equipment but aren't sure how to finance it, you're not alone. Equipment financing can be a confusing and daunting task, but it doesn't have to be. In this post, we'll answer ten of the most common questions we get asked about equipment finance so that you can make the best decision for your business.

1. How does equipment finance work?

In short, equipment financing allows you to purchase the equipment your business needs now and pay for it over time. If your business doesn't have the cash on hand to finance equipment outright, equipment finance is the ideal way to acquire the equipment you need. Alternatively, you may want to conserve your working capital for other purposes and equipment finance makes this possible.

2. What are the benefits of equipment finance?

There are several benefits that come with financing your equipment purchases rather than paying cash upfront. Firstly, it conserves your cash flow, which can be better used elsewhere in your business. Secondly, it allows you to deduct the interest paid on your tax (talk to your accountant to confirm this). Lastly, because the loan is generally secured by the equipment itself, it's often easier to qualify for than other types of business loans.

3. What are the drawbacks of equipment finance?

Of course, when it comes to equipment finance, there are some drawbacks that you should be aware of before taking out an equipment loan.

Firstly, if you default on the loan, you could lose the collateral used to secure the loan (i.e., the equipment).

Secondly, there may be additional costs related to taking out an equipment loan, such as an origination fee, prepayment penalty fees and late payment fees to name a few.

Lastly, finance on lost or damaged equipment will still need to be repaid and additional equipment finance will need to be sought to replace these items.

4. I hear the phrase chattel mortgage all the time. What does this mean?

Most equipment loans are secured by the equipment that you are purchasing. This is known as a chattel mortgage. This offers lenders some protection in case you default on the loan, as they can repossess and sell the equipment to recoup their losses. However, it also means that you typically need to put up some form of collateral, such as another piece of business equipment, to qualify for a loan.

You have some flexibility when it comes to your repayments. You can make higher repayments so that at the end of the term, you own the equipment outright. Alternatively, to assist your business's cash flow requirements, you can make lower monthly payments and make a residual payment at the end of the loan.

5. What if I don't qualify for a chattel mortgage?

Don't despair! If you don't qualify for a chattel mortgage, you still have options available. Equipment leasing is an excellent alternative to acquiring equipment and the lease agreement can be tailored to meet your business's needs.

Lease financing can be used for vehicles, office furniture, technology and anything else to keep your business running efficiently. Depending on your leasing contract, you may have an opportunity to purchase the equipment for fair market value at the end of the lease. Alternatively, the contract may allow for the leased equipment to be returned with no further payment required.

6. Help, I have a balloon payment due, and I can't afford to pay it from my cash flow. What are my options?

Don't panic. If you have opted for a balloon payment or a residual income but you are short on cash flow, you have options:

• You can refinance the residual amount into a new equipment loan
• You can extend the existing lease contract
• You can sell the equipment and use the funds from the sale to pay out the finance.

7. Should I lease or buy with an equipment loan?

Both finance options have their pros and cons. A lease agreement can help you acquire equipment that is only needed for a short period or needs to be updated on a regular basis. The lease term and repayments can be lower as you are paying to use the equipment, not paying to purchase the equipment.

Your monthly repayments on a chattel mortgage may be higher than lease payments. However, in the long term, this type of loan will save you money.

8. Can I claim the cost of financing equipment as a tax deduction?

Everyone's circumstances are different but as a general rule, you can claim the following:

Equipment Lease - if the equipment you are leasing is specifically used for business purposes, you may be able to claim the leasing costs as a tax deduction.

Chattel Mortgage - you may be able to claim the interest you pay over the term of the loan. As you take ownership of the equipment from delivery and can include it as an asset on your balance sheet, you may also be able to claim depreciation.

We strongly recommend you speak with your accountant who will consider your own individual circumstances.

9. What information will I need to provide when I apply for equipment finance?

When applying for equipment financing, you need to have your paperwork ready. The lender may require some or all of the following:

• 2 years' financials for both you and your company
• Held an ABN for 2 years
• Be registered for GST
• Rates notice if you have the property (while this is not essential, it can result in a cheaper interest rate)
• 6 months of bank statements
• Depending on the age of the equipment, especially vehicles, you may need to have it inspected prior to the purchase.

Don't have the appropriate paperwork?

If you don't have financials available for the last two years and are looking to purchase new equipment, you may still qualify for a low-doc loan.

10. How do I apply for equipment finance?

The equipment financing process can be daunting. Working with a finance broker who specialises in equipment finance is a great place to start. They will get to know your business and will help you find the best deal to meet your individual needs. Not only will they find you the right deal, but they will do the paperwork too!

Conclusion:

Assuming you've decided that financing is the best option for your business, there are a few things you'll need to take into consideration before applying for a loan. First and foremost, you need to decide on the right financing option for the equipment you need to purchase. You'll also need to compare interest rates and fees from different lenders to make sure you're getting the best deal possible.

Why not talk to the team at Finance Brokers Victoria, they can help you get the most out of your equipment finance and give you the tools you need to keep your business running smoothly.

Read: How Can Green Equipment Finance Helps Grow Your Business?