Making equipment finance workable and affordable as rates, costs and prices rise

Businesses are facing somewhat of a mixed messaging and a mixed fortune time in many sectors. Confusing which may have some delaying decisions around taking on equipment finance to invest in new plant, machinery and equipment.  On one hand, we’re told by politicians and the RBA, that the economy is bouncing back well from the pandemic and businesses are recovering.

But this great bounce back appears to have created a downside – rising interest rates and surging inflation. Businesses are offered attractive tax benefits for the acquisition of eligible assets but lending rates are creeping up.

At the same time, business owners in many sectors are dealing with labour shortages which is restricting their ability to operate to the max. Supply chains are disrupting production and income in many areas and costs of living are skyrocketing as inflation surges.

Decisions around whether or not to proceed with equipment acquisitions have become – complicated! For example, on one hand, should the decision to buy be put off until the situation around costs and supply chains improves? Over that time, interest rates could rise and the costs of maintaining that ageing equipment and the loss of productivity represents a lost benefit.

Solutions to dealing with a rate and price rising climate can be found by sourcing equipment finance which is affordable and actually works for the business. As specialists in structuring equipment finance to specifically suit individual businesses, we lay out a number of pathways to achieving workable equipment finance to enable a business to invest in the equipment required.

Sourcing Cheapest Interest Rates

The RBA has now raised interest rates at its last two board meetings and has stated that additional rises are ahead. So record low rates may be history but that doesn’t mean cheaper and better interest rates on equipment finance are an impossibility.

In a rising rates climate, the emphasis is squarely on looking more closely at the lending market and options available to you. Changing the way finance has been sourced in the past, not settling on the same old way or same lender the business has used previously.

The finance sector in Australia is continuing to grow with new non-bank lenders regularly entering the market. Many of these non-bank lenders specialise in industries or sectors including heavy equipment or machinery finance. Many also do not work directly with businesses but through brokers and broker style lenders such as Jade Equipment Finance.

Why are we telling you about these lenders? Apart from the fact that we can provide access to many of these lenders, we are also highlighting them because of their tendency to be more flexible. Without the banking status restrictions, they can be more open to negotiating on, you guessed it, interest rates and those all-important loan conditions.

So sourcing the cheapest interest rate, which is a real key to cheaper equipment finance, can start with selection of lender and engaging a broker to provide access to finance channels that have not previously been considered.

Another key consideration is the business credit profile. All lenders assess the credit rating of applicants and the better the rating, the lower the interest rate, in general terms. So don’t let those bill payment deadlines slide.

Finance Structure

Interest rate rises are unavoidable – that is in the hands of the RBA. What may be avoidable is settling for unworkable equipment finance. Affordability can be the magic word when it comes to finance and that can come down to the monthly outgoings – the repayments. In an environment where costs of living are pressuring both business and household budgets, reducing regular monthly payments can provide a level of relief.

Businesses can start by considering how the finance is structured and by seeking professional assistance through engaging a broker. Lenders will have their individual guidelines around what they will and won’t approve in regard to loan terms and other aspects of the finance. Our consultants however, have access to lenders that will negotiate.

The key aspects which can be varied to achieve affordable repayments and where we may be able to assist are:-

  • Total loan amount: pay a deposit to reduce the amount required to be financed or select a lower priced make or model could be possibilities.
  • Loan terms: negotiating a longer finance term can reduce the monthly repayments.
  • Balloon and residual: larger balloons/residuals can reduce the monthly repayments, but there are other issues to consider around this decision.

Finance Product Selection

The selection of finance product can be determined by the accounting method used by the business and overall financial objectives. But with rates rising and varying across the range of finance products, now could be the time to have ‘the talk’ with the business accountant. Discuss if it is possible that accounting methods could be changed to make the business set-up more suited to a lower interest rate loan such as Chattel Mortgage.

The taxation benefits also vary across finance products. While all business finance products offer tax deductions, some are more attractive. These additional deductions may be factored into the overall cost of the finance and effectively represent a savings or at minimum, a gain in the short-term.

For example, opting for a lower rate Chattel Mortgage on the equipment in order to implement temporary full expensing and Loss Carry Back. The tax benefits realised in the current financial year may just be the short-term relief required.

Delaying plant, machinery and equipment investments may mean missing out on gains in efficiency which may reduce fuel and energy consumption and costs; improvements in productivity which may be vital where labour shortages exist; and in bottom line profitability with the costs of maintaining obsolete and ageing equipment.

Securing workable and affordable equipment finance at better interest rates could be the solution to effectively navigating through the current economic climate.

To discuss refinancing equipment loan solutions for your business contact Jade Equipment Finance on 1300 000 003