Raising the topic of refinancing at a time when interest rates have been on the rise may seem a little strange as arguably, the most popular reasons for refinancing equipment loans is to achieve a cheaper interest rate loan. But there can be other objectives that business owners may aim to achieve through refinancing. Businesses may aim to ease pressure on cash flow in a time of high operating costs by refinancing to lower the monthly equipment loan repayments. Refinancing can form an important part of an overall finance restructuring strategy to better position the business for success in challenging times.
In 2020 and 2021 when the RBA was slashing interest rates to historic lows, refinancing was an attractive proposition for many operators to achieve lower interest rate finance. But since early 2022, inflation rose and along with global supply chains issues and labour shortages, have presented many businesses with higher and increasing operating costs. In announcing the November inflation figures, the Australian Bureau of Statistics noted that higher operating costs including for materials and labour was a major contributor to inflationary pressure in a number of sectors including new dwellings/construction. Electricity prices are place enormous pressure on many businesses.
Labour shortages are also taking their toll, preventing many from operating to their optimum capacity and as such, limiting income opportunities. These issues may be reason for many business owners to review their overall income and outgoings position in search of ways to cut costs to improve the bottom line.
While some business expenses are not within the power to control or cut, repayments on equipment finance is a possible area where savings may be possible to achieve through refinancing. In this instance, the objective of refinancing may be to reduce the monthly finance commitment rather than to secure a cheaper interest rate.
Another possible scenario for refinancing could be that when rates were at historic lows, some may have secured finance and opted for a higher repayment amount due to the low interest rate available. Allowing the finance and the debt to be paid out sooner and reduce total interest payable while improving the balance sheet. That decision may now require re-evaluation if there is a need to cut outgoings.
In the face of the current challenges for many businesses, refinancing may be a solution to ease the pressure on cash flow and offset rises in other areas.
Refinancing Equipment Loans
Refinancing Equipment Loans is the process of sourcing a new loan to replace an existing finance contract. The entire amount currently owing on the existing loan, including any balloon or residual and payout fees, would be included in the new loan. A full payout figure can be requested from the existing lender to ascertain the total amount required for the new loan. Payout figures are typically quoted as valid to a certain date.
The refinanced loan can be with the existing bank or lender or with a different lender. There is no obligation or necessity to have an existing account with say a bank, in order to apply for finance through that lender. We have multiple lender accreditations to provide customers with wide choice when it comes to sourcing refinancing options.
As with all business finance applications, our lenders assess each application individually and based on the current financials and credit rating of the business. A quote is sourced for consideration by our customer. As a licensed finance provider, we do not advise proceeding with refinancing where the outcome would not be positive for our customers. Referring to the business accountant for advice may be advisable in some circumstances.
Where the objective of the refinancing is to reduce the monthly repayments, a longer finance term may be requested. Longer terms can reduce the monthly repayment but can attract a higher total interest payable. Another option is to consider varying the amount of the balloon or residual. This can also reduce the repayment amount.
The interest rates applicable to refinanced loans will be based on current rates and subject to an assessment of the individual application. With rates now generally higher than say in 2020 and 2021, if the existing loan was sourced at that time, it would be unreasonable to expect a rate to be offered which was lower than those historic lows. But we will still be working hard to achieve the cheapest interest rates possible for the refinanced loan.
Refinancing Product Options
When refinancing, the loan type can be the same or different from the existing loan. Depending on the business set-up and overall objectives, the selection may be made from the range of equipment finance products including Leasing, Rent to Buy, Commercial Hire Purchase and Chattel Mortgage.
The general tax benefits of each finance product should be applicable to refinanced loans with the exception of temporary full expensing with Chattel Mortgage. To be eligible for this tax measure, the assets must be ‘new’. Refinancing may not meet the ATO criteria.
Refinancing may be a very workable solution to reduce monthly commitments on equipment loans in order to offset higher costs or lower capacity. But there are factors to keep in mind. Any penalties and fees which may be incurred by finalising the existing loan early and establishing the new loan will need to be factored in.
Any implications regarding tax should be discussed with the accountant.
The equipment may have been purchased new originally, but for the purpose of refinancing, it would be considered as used. Used goods may attract higher interest rate finance than new goods.
Depending on the objectives and the perceived need for refinancing, we may be able to offer other, more workable finance solutions. These may include a Business Overdraft Facility or a Secured Business Loan.
Refinancing may be a workable solution to achieve a better loan repayment schedule to assist businesses overcome the higher cost challenges in this inflationary period.
To discuss the refinancing options specific to your requirements, contact Jade Equipment Finance 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.