A business can't succeed without the right tools.
For many businesses obtaining the equipment they need to run their operations can be extremely expensive, the upfront costs especially can put pressure on any business. Thankfully though, when it comes to requiring equipment there are several options available for financing your_business's needs. One of these options is Equipment Finance.
As we have touched on in the past, Equipment Finance also known as Asset Finance_is a funding solution created to help businesses purchase equipment, vehicles and machinery that they need to launch, run or expand their operations.
Once the funding is approved, the price of the asset is then repaid over a fixed term and with usually a fixed interest rate. Subject to the terms of the financing agreement, the business may take ownership of the asset once the final payment has been made if it's a lease or the lender will offer to refinance the asset if there's a balloon payment, or you can return it to the lender or even sell the asset.
What are some things you should look out for and think about when applying for Equipment (Asset) Financing?
Own or Lease?
As you start looking into equipment finance, you will see you have the option to lease the asset, "hire-to-purchase", or a commercial loan agreement. What you choose should really be based on your long term needs and when trying to decide which option to take, discuss the following questions with your financier to work out which is the best route for your business to take.
- Does the type of equipment you need depreciate rapidly, and would the ability to exchange the equipment for a new model be important for you?
- How often will the equipment be used? Is it worth paying more to own it faster or paying less to lease it if only being used occasionally?
- Do you have enough cash for a deposit for funding, and for higher repayments or would you prefer to make smaller repayments?
- Should you take a shorter term if you plan to roll the asset over ? Ie match the term with a higher balloon, to how long you'll keep the asset for.
- Would having an owned asset on your balancing sheet help when it comes to obtaining financing in the future?
- What are the tax implications of either option?
- If the equipment required has a long lifespan, would you be better of long-term having finance to own it outright?
Default/Repossession if Lease Unpaid
The funding for Equipment Finance is secured against the asset. This is great as it means you don't need to use your personal property or home as collateral for the loan. However, if your lease or funding goes unpaid then your equipment can and will be repossessed.
Tax
Just when you thought you were as confused as you could be, there are also several things to factor in when it comes to acquiring Equipment Financing and the resulting tax benefits.
If you use the equipment to generate income, then things like the depreciating of the equipment and factors to do with the interest repayments can be claimed as tax deductions. Leasing payments are tax deductible and are seen as a monthly expense whilst if you have financed to own the asset outright then you also have advantageous tax incentives.
We highly recommend speaking to your tax agent regarding tax information around Equipment (Asset) Finance before signing on the dotted line.
We asked Trudi Cowan from TCK Accountants what her thoughts were when it comes to Equipment Financing; "Tax is often an important consideration for businesses in purchasing new equipment. The interest on financing a business asset is typically deductible. However, the rules around depreciation have changed a number of times in recent years with full write off concessions available for small business and then as a result of COVID. So it is important to speak to your accountant before purchasing new equipment to understand whether a full write off is available or if the particular asset will be depreciate for tax over a number of years. Modelling the tax impact of purchasing the asset can be a useful tool when considering the timing and quantum of large asset purchases."
Depreciation
Depreciation is the natural wear and tear of an asset (equipment) or a property over time.
A lot of equipment can fall under this and includes construction and production machinery, furniture, vehicles, medical machinery, forklifts, and cleaning equipment.
All these items can suffer from fast depreciation and as a result can effect the overall value of a businesses assets. For example, you could end up paying off a loan for a company car that has since depreciated and lost the value it once held.
Having an equipment finance lease can usually help to remove any of the risks of a depreciating asset, as the financier takes responsibility of the depreciation, some equipment failure and will usually replace the equipment at no additional cost if certain requirements are met. It also means the business wont have any depreciation to claim, or an asset on your balance sheet.
Depreciation on assets is complicated and is not black and white. It is important you seek professional advice to ensure you choose the right option for your requirements and scenario.
As you can see there are many things to consider when thinking about Equipment Finance. These different options fall under the titles of different types of Equipment Financing which are:
- Finance Lease
- Operating Lease
- Commercial Hire Purchase
- Chattel Mortgage
Each of these has its own terms and conditions depending on your requirements. If you want to lease and have the option to upgrade or own your asset at the end of repayments.
If you're thinking of purchasing new or second-hand equipment for your business, then contact our Finance Specialist Sarah Eifermann at SFE loans to discuss what Equipment Finance solution could benefit you the most.
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