One of the key take-outs from the economic effects of the pandemic for many businesses has been the need to stay across their financial situation. To be agile, flexible and most importantly to keep costs under control and workable with cash flow. To achieve a more workable cash flow situation post-pandemic, businesses may consider the current low interest rate situation as an opportunity to reduce operating costs through refinancing equipment loans.
With the RBA holding rates at the historic lows, the prospect of refinancing at the current rates can be very attractive. Jade Equipment Finance works with customers across many industries to explore the options and benefits that refinancing might present by providing refinance quotes and offers on a wide range of machinery, plant and equipment loans.
There are a wide range of reasons as to why would a business may consider refinancing their existing loan arrangements.
These include but are not limited to:-
- Change in the business structure. In the situation where a business partner has exited the business and that person was attached to the security of the loan when it was set up. The loan may have been secured based that person’s credit profile or assets.
- The loan was secured initially at a time when interest rates were significantly higher than current rates and a lower rate loan is sought.
- A general review of the business financial situation is being undertaken.
- Seeking to reduce repayments to reduce pressure on cash flow.
- Seeking to alter the loan term to reduce the debt faster.
- Generally seeking to reduce operating costs through cheaper loan options.
- Initial loan secured as bad credit but the situation and credit profile has improved and a better finance deal is sought.
- Desire to change to a different type of loan from say Lease to Chattel Mortgage.
- Paying out a leasing residual or Chattel Mortgage balloon at the end of a finance term.
Before committing to a refinance arrangement, it is important to understand what the process involves and particularly what costs may be incurred.
- Refinancing is the process of actually replace one loan with another. That is a totally new finance arrangement.
- While the equipment may have been new when originally purchased, after several years of use over the loan term so far, the goods would now be considered as used. This may attract a different interest rate to new goods and may attract special conditions or consideration by lenders.
- The cost of establishing the new ‘refinanced’ deal needs to be taken into account and balanced against the benefit gained.
- The application for refinancing would be assessed based on the same guidelines as normal finance applications.
- Refinancing may mean paying out the existing loan early which may attract payout fees by the lender.
- The refinanced loan can be with the same or a different bank or lender.
- The refinanced deal may be with the same or a different loan product.
Loan products available for refinancing include:-
- Chattel Mortgage
- Rent to Buy
- Commercial Hire Purchase
Refinancing Mid-Loan Term
When refinancing is sought at some point during the loan term, the targeted outcome may be to achieve a different finance term and/or to achieve a lower monthly repayment. This objective may be achieved with a new loan arrangement.
A lower repayment may be achieved by changing the loan term – longer term lower repayments. Or by achieving finance at a lower interest rate while retaining the loan term balance on the existing loan. For example if there is 4 years remaining on the loan a refinanced deal may be structured over 4 years but secured at a lower interest rate which would result in a lower monthly repayment.
As mentioned above, the costs attached to refinancing should be taken into account. Also as mentioned above, the goods would be considered as used not new.
Refinancing Residual and Balloon Payments
One of the most common uses for refinancing is to fund the payout of an equipment finance balloon or residual. A balloon (Chattel Mortgage) or residual (Lease) is structured into the finance when originally established. This percentage of the loan amount is due for payment when the final repayment is made.
Businesses seeking to conserve the existing funds very often seek to refinance this balance. Refinancing a balloon/residual may be done with the same or a different form of loan and may also include a balloon/residual.
The same selection of loan products is available for refinancing a balloon as for establishing a new equipment loan. As balloon refinancing occurs at the end of the loan term, no break fees or payout charges should apply. New loan establishment charges would apply as with all finance.
Refinancing Interest Rates
As mentioned above, by its very definition refinancing implies the finance for goods which have been in use over a time period. As such, the interest rate applicable would be for used goods. This may differ depending on individual lenders. Your Jade consultant will source the cheapest refinancing interest rate from across our lending panel.
Refinancing can be an effective strategy to reduce operating costs and set up a business with a more workable cash flow situation and open opportunities for growth and expansion.
For all equipment refinancing speak with a Jade Equipment Finance consultant on 1300 000 003
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.