Commercial credit facilities provide an option for a balloon or residual amount. While this is optional, the majority of operators will choose to include this option in their machinery funding arrangements. It can reduce monthly repayments, allowing a more flexible and workable acquisition. But the equipment finance balloon is due for payment as a lump sum, at a set time – when the funding term ends.
Operators then need to address how they will meet that payment, which in the case of units, may be a significant amount. Operators may not wish to use their reserves to make the payment, preferring to keep such funds for other purposes. Some may choose that timing to upgrade machinery and use the resale proceeds or trade-in value to payout the credit commitment.
Where neither of those options are suitable or acceptable, the amount payable may be financed with a new credit contract. Jade Equipment Finance provides expert, specialist broker services to source the best rates and structure refinancing to pay out an equipment finance balloon. This can present an extremely cost-effective way forward to retain the asset while realising any relevant tax deductions from the credit facility.
Purpose of an Equipment Finance Balloon
Selecting to incorporate a lump sum, end of term pay out into a commercial credit arrangement can be extremely effective. This is an option with Chattel Mortgage and Commercial Hire Purchase, while a residual is available with Lease. By setting aside a portion of the total required to fund the equipment, monthly commitments can be reduced to a more workable level. Providing a more accessible way for some operators to purchase the machinery they require.
Options for Finalising Equipment Finance Balloon
This final payment amount is due to be paid to the lender after the final monthly commitment is made. With a number of options available to operators, it can be advisable to start thinking about this 1-2 months prior to the due date. Allowing full consideration of the options – benefits and costs, to establish the best way forward.
The exact amount due should be obtained from the lender. Interest would be charged over the term and the exact amount is required to allow full consideration of payment alternatives. Operators can decide to bring us in at this early stage and we can contact the credit provider to ascertain the information required for settlement.
The three options for finalising the amount are to sell the machinery and use the proceeds; to use available cash; or to take out new funding, effectively refinancing the machinery. We can provide quick quotes on refinancing so operators have the information they need to decide which is the best way forward for their enterprise.
How to Finance an Equipment Balloon
Where funding the amount payable with new credit is selected, this is akin to refinancing equipment. However, as it is occurring at the end of the term, unlike refinancing during the term, no early payout fees would be applicable.
Credit facilities for this purpose are Leasing, Rent-to-Buy, Chattel Mortgage and CHP, where the lender accepts the unit as suitable security. This is an important aspect to keep in mind as the machinery will be assessed as second-hand, even if the operator purchased it new.
If the condition of the machinery is not considered suitable collateral for a secured credit facility, we have affordable Unsecured Business Loans to consider. The interest rates are higher in unsecured compared with secured credit. But with our access to more lenders, we can source affordable solutions on unsecured credit.
When refinancing, a different credit product and a different lender, or the same, may represent the most suitable solution. If originally purchased with say Rent-to-Own, a Chattel Mortgage may be a better solution for the new credit.
Across all credit facilities, the interest rates, conditions and the terms approved will be established based on second-hand machinery credit approval guidelines.
Tax Deductions on Refinancing Equipment Finance Balloon
As with the original funding arrangements, operators can realise the tax deductions relevant to their choice of credit product. These would be as per Australian Taxation Office rulings when the credit is arranged. Currently that includes depreciation allowances for goods purchased with CHP and Chattel Mortgage and deductible payments with Lease and Rent-to-Own.
Where the machinery was originally funded with CHP or Chattel Mortgage, the operator would have claimed the GST in full just after purchase. As such, no additional GST would be applicable if Chattel Mortgage or CHP is the choice for refinancing.
Where Leasing or Rent to Own are selected, the GST is charged to monthly payments and claimed accordingly.
Prepare by Calculating Estimates
To assist in making the decision as to which way to go, operators can calculate estimates with the Equipment Finance Calculator. An amount will be needed to work from so a call to the current lender will be required to ascertain what is payable. Alternatively, contact us and we will prepare quotes for your consideration.
Contact Jade Equipment Finance on 1300 000 003 to discuss options for finalising an equipment finance balloon.
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.
