Financing can be a perilous business. At the mercy of your financial institution, you can be left wondering if you got the best rate for you—or for the bank. How can you prepare yourself with the knowledge you need, and make sure you’re getting the best value? We spoke to Sean, the managing director from EquipFin, about financing, and how to be smarter about it. Sean’s years of experience make him one of the best in the business, and he makes it his mission to provide clients with the best rates and advice possible. Here are Sean’s top tips, to avoid some of the pitfalls when financing equipment.
Save money by organising your finance pre-approval early.
Like any aspect of business, planning plays an important role in finance and related equipment purchases. Too regularly customers miss opportunities to buy an asset, or miss out on a special price simply because they were not in a position to pay for the equipment quickly enough.
Organising a finance pre-approval at least a few weeks in advance allows for possible delays in the application process, and ensures that you are able to buy as soon as you find the right asset.
“Finance pre-approvals are generally valid for about 3 months, so don’t leave the pre-approval process until the last minute, as it not only puts unnecessary pressure on you, but exposes you to the additional cost of missing out on the equipment and potentially paying a higher price.”
For Example: A customer inquired about finance, with no immediate intention to buy some equipment. The benefit of a ‘no-obligation’ pre-approval was explained, to which he agreed, applied, and was subsequently approved. Originally he was not planning to purchase for 3-6 months. However, 3 days after the approval came through, he happened to meet someone who was closing down their business, and he had the chance to buy the equipment at a 50% discount; on the condition that he pay for the equipment within 2 days.
Because he was already pre-approved, he was able to organise payment in the required time frame, subsequently saving himself approximately $30,000. Winning!
Finance terms should be tailored to your business and personal situation
There is more to financing equipment, than simply being quoted a monthly repayment. Any good finance company or broker should provide businesses with a tailored finance solution that meets a variety of needs.
Businesses often make a decision based simply on the interest rate or the monthly repayment. While this is definitely important, the ‘right’ finance solution looks at the type of equipment, how it is used, the future of the business, the bank’s credit restrictions, the strength of the customer finance application, and a range of other factors.
The art to tailoring a finance contract is to understand a customer’s short and long-term needs, and find a balanced solution that takes into account all the factors that can impact the effectiveness of the finance contract.
“Entering into a finance contract that is not tailored to your needs, can result in cash flow pressure or incur opportunity costs of a poorly structured contract.”
For Example: A successful sole trader excavator operator wants to upgrade his excavator; he has cash in the bank, and is earning a good income. He is thinking of putting in a large deposit, and wants to pay off the loan quickly (i.e. over 3 years).
While this may sound like a good idea, upon digging a little deeper it is uncovered that this arrangement may not meet his longer-term needs. After a brief conversation, it is discovered that the client does not yet own a house, but is planning on buying one in the next 18 months. Furthermore, the contract on which his business is currently working is due to finish at the end of the year.
Therefore, his decision to use his cash as a deposit would reduce the funds that he could use to buy a property. Also, the short term on his equipment finance contract would result in a high installment, therefore reducing his capacity to borrow on his future home loan. In addition to this, the fact that his contract finishes shortly, may create some uncertainty around his cash flow position in the future.
In this instance, the client decided upon a no-deposit loan for his equipment, which conserved his cash, and he also financed over a longer period, which meant that he was left with smaller installments.
Should I pay off my equipment finance contract quickly?
Every businesses situation is different; therefore, there is no single answer to this question. However, there are some basic principles that customers need to understand when deciding whether to pay out finance contracts before their due date:
Equity in equipment ties up cash
While clearing out debt may seem like a good idea, there are often many other options for the use of capital, which can be more beneficial to the business. Once you have paid off a loan early (spending your cash to do so), it can be difficult to release that capital down the track, if you need it for other purposes.
Most fixed term equipment finance contracts charge penalties for early termination
If you decide to pay off an equipment finance contract early, many financiers will retain a proportion of the future interest as a penalty. This significantly negates the advantages of paying out early.
Interest expense is tax-deductible
In most circumstances, the interest on a loan (or a proportion of it) is tax-deductible. By paying out your contract early, you will actually reduce your tax-deductible expenses.
One of the biggest mistakes made by businesses who have enjoyed a period of growth, is to ‘clear out’ debt. Unfortunately, this can leave them short on capital and can put the business under strain. Cash flow is one of the biggest hurdles for business; because of this, many will choose to finance their equipment to maintain a healthy cash flow and not put their operations under undue pressure.
Thanks Sean, for your invaluable advice for those looking to finance their equipment. There is no question that the intricacies of finance can be a little bemusing to most punters. When in doubt, consult a broker or finance organisation who you are comfortable with, and discuss your particular situation. Now that we’re armed with the tools for the job, we’re feeling a little…