The recent cash rate rises by the RBA were not really a surprise. Inflation had been soaring for some time and some analysts were surprised that the central bank didn’t act sooner with a cash rate hike. While not a surprise, higher interest rates are still a major consideration and higher cost impost for businesses planning new equipment purchases with finance. But while many businesses will be well-placed to plan and cope with higher rate finance, those requiring bad credit equipment loans may be particularly alarmed by the current situation.
Those requiring bad credit finance already face quite a number of challenges and obstacles to sourcing loans and more importantly affordable finance. The higher rate environment may be seen as making that situation even more difficult. If finance to acquire new equipment and machinery is not a workable option, the business itself may become vulnerable.
Bad credit finance applications, by their definition, are seen as a higher risk by lenders. This results in higher interest rates being offered compared with finance for good credit profile applicants. Additional conditions are also applicable. With rates rising and the RBA tipping even more hikes ahead, have the prospects for bad credit loans changed? Some may have and some remain constant.
Bad credit equipment loans at workable rates may be achieved amidst rising rates by engaging with Jade Equipment Finance, a broker-style, specialist lender. One of the most important considerations for businesses requiring cost-effective bad credit loans is the lender. Not all major banks and finance companies readily offer this type of finance in their portfolio. Connecting with a lender such as Jade that does have access to this type of finance is the first step towards a possible workable outcome.
We outline what is involved in sourcing bad credit equipment loans the expectations a business should have and what is possible.
Defining Bad Credit
The reference of bad credit is a direct description of the actual business or individual who is applying for the finance. In the case of very small operations such as sole traders and owner-operators, the credit situation of both business owner and business may be addressed together.
Individuals can consider the range of steps available to repair their credit profile. Taking action may improve the score and improve the prospects for a better bad credit equipment loan.
A business can find themselves in a bad credit situation due to defaulting on loans, establishing a track record for continual slow payment of bills or through bankruptcy. These situations may eventuate as a result of the business’ actions or behaviours or may be brought on via a flow-on effect from its customers or suppliers.
It is important to note that some lenders will be considerate of the circumstances which led to the bad credit rating. Applicants are encouraged to be open and honest and wherever possible, provide documentation around the circumstances to support the finance application.
Bad credit does not by definition apply to businesses that are new or starting out. That is a separate category and those in that position may require No Doc or Low Doc Equipment Finance. These loans have different criteria to bad credit finance.
Loan Conditions and Options
As mentioned above, not all lenders do offer bad credit equipment finance. We can offer assistance to business in this position due to our vast accreditations. These include specialist non-bank lenders that are known to be more flexible when it comes to special loans.
The bad credit loan applicant will have a poor to bad rating on its credit profile. This represents a high risk to lenders and results in a number of possible conditions being placed on any loan offer made:-
- A higher interest rate than for good credit applicants is to be expected. Applicants should plan for this by working their financials to work with a higher rate and hence higher repayments.
- A limit might be set on how much in total will be approved for a bad credit loan. Applicants can prepare for this situation by having options to reduce the amount requested by selecting lower priced machinery or making a deposit to reduce the amount required,
- Extra security as well as the equipment being acquired can be requested. This may take the form of property or assets.
- Conditions may also apply to the loan term and the residual/balloon which is approved.
Rising rates may have an impact on bad credit equipment loans through the increase the rate would have on the total amount of the finance. A higher rate, compared with what may have been available pre the rate rises, will result in a larger amount of interest in total. This will increase the overall amount payable. A situation which may incur conditions by lenders.
Some may look to purchasing used equipment rather than new to reduce the price and hence the loan amount required. In this regard, note that in some cases, used equipment may attract a higher interest rate than new equipment. The interest rates advertised by lenders, unless indicated otherwise, will be for new goods. Opting for used may be counter-productive to achieving the best interest rate loan.
Also worth noting is that interest rates do vary on equipment for different industries.
When the application for bad credit is approved, the business should be in a position to opt for their choice of equipment finance product from our full portfolio of options.
Offsetting Higher Rates
While bad credit equipment finance will attract a higher interest rate and that will rise as the RBA continues to hike the cash rate, offsets may be realised through tax deductions. The tax deductions vary on the different loan products.
Temporary full expensing, which is available in the 2022/23 financial year, offers significant tax benefits for those businesses that meet the eligibility criteria.
We address every bad credit equipment loan application individually and with respect and consideration. Quotes are sourced and negotiated as best as possible by our consultants. We can never guarantee general, broad-based success for everyone. However, utilising our services can place applicants in a better position to achieve a workable offer compared with handling the process on their own.
Contact Jade Equipment Finance on 1300 000 003 for a confidential discussion about how we may be able to assist you with bad credit 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.