When acquiring new plant, machinery and equipment, business owners will be seeking to achieve an optimum return on their investment. Generating improved productivity, increasing efficiency in production and output and increasing profitability. While buying at the right price and securing finance at the cheapest interest rate can be key to achieving these goals, there is one other factor to consider. The timing of when the machinery is acquired and when the equipment finance is secured can affect those costs and impact ROI over the working life of the equipment.
Currently there are a number of issues on both the local and global scene which are making the timing of procurements of finance and machinery and finance even more relevant. Issues which are indicating that the short term could be looking like a better timeframe to make those all-important investments in new plant, machinery and equipment.
As the pandemic continues to have impacts on many sectors of the Australian economy, it is understandable that many business owners would want to take a cautious approach to undertaking major asset investments at this time. But considering the bigger picture may provide reasons for a rethink and spur many to bring forward their upgrade plans. We explain the factors that we see as being valid reasons to enact those plans to secure equipment finance for machinery acquisitions.
Equipment Finance Interest Rates
Lending interest rates across the markets have been at historic low levels for quite a long time but this is no time to get comfortable with that situation. The RBA cut the official cash rate to the historic 0.1% in November 2020 as a response to the economic effects of COVID-19. After several rate cuts in 2020 the November one came as quite a surprise to many. But many have taken advantage of the situation to secure cheap interest rate finance.
Banks and lenders essentially use this cash rate as a starting point from which to establish the rates they will charge on finance and loans across their own markets. Interest rates vary in different lending markets, from lender to lender and across the different commercial finance products.
Throughout 2021 the RBA has kept rates on hold and has strongly indicated that it would be patient in waiting until the economic conditions were at appropriate settings before increasing the cash rate. While many pushed for specific timings and the RBA indicated it did not expect these conditions to emerge until around 2024, it stressed it was more about the settings than an actual date.
Those settings are primarily inflation and unemployment and to a lesser extent wage growth. The target for inflation is sustained in the region of 2-3% and unemployment possibly around 4% or sub-4%. So what’s happening now that could change the predicted 2024 timeframe? Inflation has increased markedly in recent figures and unemployment has defied the COVID-19 outbreaks and continued to go down.
Are these settings at levels to trigger a rate rise? Some analysts say ‘yes’ and are predicting that the RBA will increase rates this year and possibly as soon as August. Individual lenders of course may act independently and increase rates in their individual markets which some have done in the housing loan market.
What that all may indicate for those considering new machinery purchases at some time in the short to medium term, is a good reason to act sooner. Equipment finance interest rates are at their best at the moment and while Jade Equipment Finance has a policy of always acquiring better interest rates, the lending market does determine to some extent how low even we can go.
Interest rate fluctuations tend to be in extremely small increments. But these small increments can represent large increases in the total interest charged on the equipment finance over the full say 7 years of the loan term. This is clearly seen by using our calculators.
Securing finance at the cheapest current interest rates may be significant in achieving optimum ROI on acquisitions.
Operating unreliable machinery which could be approaching its useful working life can flow on to a major hit to profitability. The ongoing maintenance and repair costs and downtime can impact have serious impacts for operators.
Equipment manufacturers are constantly developing and launching more efficient models and purchasing sooner rather than later may place the business in a better position to achieve efficiency gains.
Gains in fuel costs as well as increased performance and output, improved operator experience and overall efficiency and productivity improvements.
A major factor in acquiring new equipment recently has been supply issues. Manufacturers have been impacted by both the pandemic and the computer chip shortage. Operators planning to upgrade may be advised to get in fast to secure stock when it is available. Putting off that move may result in having to wait for delivery which may be at time when prices have increased and so too interest rates.
Optimising Tax Benefits
Receiving a larger tax deduction for an equipment acquisition can contribute favourably to an overall better ROI. The current accelerated asset depreciation measure – temporary full expensing, is providing eligible businesses with attractive deductions on eligible equipment purchases.
To be in a position to claim that deduction in this financial year, the equipment needs to be operational in the business prior to the end of the financial year. Clock’s ticking!
Jade Equipment Finance sources and structures equipment finance to specifically achieve the goals of each of our customers. We understand and appreciate that cheap equipment finance can be critical to achieving optimum ROI and we strive to achieve the best outcome. But timing does play a part in the process and business operators looking to capitalise on the current low interest rate environment are urged to move those buying plans from the back burner to the hot plate.
Contact Jade Equipment Finance on 1300 000 003 for a quote on equipment finance.
DISCLAIMER: IF MISINTERPRETATIONS, MISREPRESENTATION OR ERRORS EXIST IN THIS ARTICLE, NO LIABILITY IS ACCEPTED. THE INFORMATION IS PROVIDED ONLY FOR GENERAL PURPOSES AND NOT IN ANY MANNER INTENDED AS THE ONLY SOURCE FOR MAKING FINANCIAL DECISIONS. THOSE THAT CONSIDER THEY REQUIRE ADDITIONAL GUIDANCE OR ADVICE SHOULD REFER TO AN INDEPENDENT FINANCIAL ADVISOR.