With the RBA acting at its Board meeting in May to raise the cash rate, business has now been placed in unusual territory when it comes to sourcing equipment finance. Times of lending rates on the rise. A situation which has not happened for over 12 years as it was 2010 when the RBA last raised the cash rate.
Especially over the past 20-24 months, businesses have enjoyed an extremely low interest rate environment with, as put by the RBA, very accommodative lending conditions. This has been the result of the RBA cutting the cash rate to provide supportive monetary policy as the pandemic took its toll on the economy.
But with the goods news of economic recovery comes the not so good news of rising inflation and the resultant rising cash rate to combat the situation. In times of rising interest rates across lending markets business can adopt certain strategies to work towards continue achieving affordable equipment finance.
While sourcing the cheapest interest rate is key to cheaper equipment finance, there are additional considerations which can work in concert with cheaper rates to achieve more affordable outcomes.
The specific strategies and approach taken to sourcing finance will depend on aspects of individual business operations and in some cases the equipment being purchased. But there are a range of universal steps or processes that many business owners can adopt to ensure they achieve loans for plant, machinery and equipment at the cheapest possible interest rate and most importantly work with their cash flow and towards achieving their objectives.
While our consultants discuss these strategies directly with our customers when taking their brief to source finance, we share some basic steps for all businesses to consider.
Broaden Lender Scope
Many business operators by habit, always apply to their bank when they require finance for any purpose including machinery and equipment loans. The Big 4 banks are the biggest lenders in Australia and we are accredited with all four as well as many other banks. But banks are not the only game in town when it comes to equipment finance.
There is a large section of the market in non-bank lenders and within that, a more specialised sector which focuses specifically on equipment finance. We are also accredited with many of these non-bank lenders.
These specialist non-bank equipment lenders can be more flexible when it comes to negotiating on many of the key aspects of finance offers – interest rates and loan conditions. They don’t always tend to be as restricted with guidelines as the banking status creates for banks.
But many of these non-bank lenders are only accessible via lending industry channels. That means the lender has a select group of finance brokers that it works through rather than working directly with business clients. As part of these groups with a number of key specialist non-bank lenders, Jade provides accessibility to these finance channels for our customers.
So a first strategy for businesses seeking cheaper equipment finance may be a rethink of choice of lender. Working through a broker-style lender such as Jade can deliver significant benefits in achieving better equipment finance compared with a DIY approach.
Choice of Finance Product
Another strategy to achieve a lower interest rate loan is to reconsider the choice of finance product. There are four main loan types available to finance new equipment – Rent to Own, Lease, Commercial Hire Purchase and Chattel Mortgage. The interest rate varies across the range due to specifics of the structure of each finance facility. This is standard across lending markets. So changing from say Leasing if that is the loan type usually selected to say Chattel Mortgage, could achieve a lower interest rate loan and hence more affordable repayments.
The basis on which a business decides the finance product for their equipment purchase includes the accounting method used by the business; approach to balance sheet; preference in regard to tax deductions; and general financial objectives.
In making a decision on finance product, businesses are strongly encouraged to refer to their accountant.
Varying Elements of the Loan
Achieving ‘affordable’ equipment finance can mean focussing on the monthly loan repayments as well as the interest rate. After all, it is that monthly commitment that can be a deal-breaker as it directly impacts cash flow and must work for the business to achieve profitability.
While our consultants focus on sourcing the cheapest interest rate loan, our customers can focus on how they would prefer us to structure that loan to achieve the preferred repayment amount.
The amount of the loan clearly impacts the repayments and the amount of total interest payable and hence the cost of financing the equipment. We offer no deposit equipment finance across our loan portfolio which enables businesses to include the full price of the plant, machinery or equipment in the finance. Additional expenses such as delivery, installation and commissioning may also be included.
While no deposit finance can be attractive in times of record low equipment interest rates, in a rising market it may not be as cost-effective. Businesses can opt to pay an upfront deposit to the equipment dealer and in doing so reduce the loan amount. This flows through to less total interest payable and a lower monthly repayment.
Another element to consider is the finance term. With up to 7 year finance terms available to many businesses, there are options. A longer finance term reduces the repayments but a shorter term results in a larger repayment.
Then there is the balloon or residual amount to consider. While lenders and in some cases the ATO will have some say in the amount permitted, this is an element which business operators can vary to vary the finance repayments.
Jade consultants work with customers and negotiate with lenders to achieve the most appropriate and affordable outcome in regard to finance structure.
Address Credit Profile
The credit rating of the business and in the case of sole traders and some SMEs, the owners and directors, is assessed as part of the finance application process. Good credit rated applicants are seen as lower risk and as such can attract cheaper interest rate finance. Addressing errors on a credit profile can be undertaken and may result in an improved credit rating and better finance offer.
With the RBA due to meet in early June, another rise in the cash rate may be made. To continue to achieve affordable or cheaper equipment finance, contact us to discuss how we can support your business implement these strategies.
Contact Jade Equipment Finance on 1300 000 003 for affordable 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.