Is your equipment finance ‘fit for purpose’ in 2022/23?

2022 sees quite a different economic environment that the past few years. While the COVID years presented considerable challenges on many fronts, the rebounding phase and resulting surge in inflation has created a new set of circumstances for businesses to confront. Prices for goods and services are soaring which is driving inflation, the RBA is raising interest rates to curb inflation, the labour market is tight and uncertainties exist around supply issues globally. To address the economic circumstances of 2022/23 especially in regard to inflationary pressures, businesses may look to their equipment finance arrangements.

Businesses seeking to overcome current and future challenges may address whether or not their equipment finance is fit for purpose in the 2022/23 environment. We’ve now seen the RBA raise interest rates for the past 3 month rates and Governor Lowe has stated further steps will be required. That is, more rate rises ahead. So delaying acquisitions in the hope that rates will go down is not a realistic scenario. Though the RBA does expect inflation to return to 2-3% in 2023 which should ease price pressures.

To address the situation as it exists now, for both businesses with current equipment finance and those intending to acquire new equipment with finance in the near future, options may be available to secure more workable solutions. Reducing repayments to ease pressure, securing cheaper rates on new finance, optimising tax benefits and refinancing may be considered as options.

Time to consider whether your approach to sourcing equipment finance and/or your current loans are truly fit for purpose or could do with amending. These are issues which are controllable whereas many of the factors around price rises and other economic conditions are not.

We outline the current challenges and how businesses may look to adjusting their financing processes to achieve equipment finance which is specially sourced and structured to suit the current economic climate.

Upward Pressure on Costs

Taking on finance for a business takes in consideration of the existing and anticipated costs being faced. With the start of the new financial year and due to other conditions and scheduled decisions, a number of business costs have been increased.

The minimum wage has been increased as a result of the recent decision by the Fair Work Commission. Other award wages are also scheduled for rises over coming months. This may represent an increased wages bill and possibly payroll tax for some businesses.

Also adding to the wages bill is the scheduled increase to 10.5% in the superannuation guarantee. This may be an added cost for operators that offer super on top of wages.

As we’ve noted in our article on recent decisions by the RBA, there are global and domestic factors which are contributing to the surge in inflation. Factors which are driving up prices both for households and businesses. On the supply side, many operators may be constrained from achieving their target outputs due to problems in acquiring necessary materials.

Price increases may drive project costs up in sectors where tenderers must adhere to fixed quoted prices. Causing the business to absorb the price increases and impact profitability.

Fuel prices have long been a source of contention and discontent for Australians. While the price at the pump has been partially reduced due to the temporary reduction in the fuel tax, that is due to come to an end in September.

Increases in interest rates can have a range of impacts depending on the business and particular it’s finance and lending arrangements. Those with Business Loans and Overdrafts which have a variable interest rate, may be experiencing increases in those areas.

To account for rises in some areas, businesses may need to look to reduce other expense to maintain profitability. One of the areas to consider is finance and loans. Reducing outgoings in this area may take the pressure off cash flow.

Adjusting Equipment Finance

There are a number of options to consider to amend or adjust equipment and other business finance to better suit the current economic conditions. The choice of lender can be critical and may be worth reviewing. Interest rates and loan conditions vary across the business lending market and sourcing the cheapest rate or more amenable conditions may be crucial to achieving a workable solution.

Opting to engage with our broker services can be of significant assistance in providing access to a wider range of lenders in order to source that cheaper interest rate loan and negotiating on loan conditions. Not all banks and lenders will have the flexibility or the preparedness to negotiate on these aspects direct with customers. Our consultants have the capabilities to know and access the right lenders to achieve the most suitable solution.

When sourcing new equipment finance, the monthly repayment will be critical to cash flow, especially in the current inflationary period. A target repayment may be achieved by securing a cheaper interest rate and/or working with a lender that will negotiate on finance term and balloon/residual to achieve that target.

Reviewing the choice of finance product may also result in a better outcome. Interest rates vary across the finance products with Chattel Mortgage attracting a lower rate than say Leasing and Rent-to-Buy. Reducing outgoings may also be achieved by optimising the use of the current tax measures available. These include temporary full expensing and Loss Carry Back.

Where existing equipment finance repayments are now putting pressure on the business as costs rise in other areas, refinancing may be an option we can assist with.

With inflation predicted to lift to 7% before starting to fall, the remainder of 2022 is looking like being a challenge for many businesses. Reviewing equipment finance now to ensure it is achieving the intended purposes and goals may better position the business to achieve improved profitability into the future.

To discuss reviewing and resetting equipment finance and sourcing new finance and loans contact Jade Equipment Finance on 1300 000 003