Maintaining a competitive advantage in your business often means keeping up with technology. But acquiring new plant and equipment or simply replacing older, outdated models can be an expensive exercise – draining your capital base and placing an even greater burden on your cash flow.

Equipment Finance however, allows businesses to fund the purchase of plant and equipment without tying up large amounts of capital. You can have the equipment you need with a repayment structure to suit your cash flow.

There are a number of Equipment Finance products available, amongst them; lease, commercial hire purchase and commercial loan.

LEASE

• • Financier purchases the unit on behalf of the customer.
• • The customer then leases the unit back from the financier via a fixed monthly rental for the agreed term.
• • A Residual payment is agreed at the commencement of the lease and is based on the guidelines established by the Australian Tax Office.
• • These guidelines stipulate the minimum and maximum residuals required on finance contracts as this is the end value the financier will have to account for when it comes to dispose of the vehicle.
• • These guidelines also prevent a customer from contributing equity to the contract given that it is technically not something the customer owns but rents.
• • Under a finance lease repayments on equipment used by the business for the purpose of earning assessable income are tax deductible.

COMMERCIAL HIRE PURCHASE

• • Financier purchases the unit and hires it to the customer.
• • A CHP contract has the option to factor in a balloon payment at the end of the term at which time title will pass automatically to the customer.
• • Alternatively, the contract can be fully amortised, that is, repaid in fixed monthly repayments with no balloon payment over the agreed term.
• • With a CHP the customer can claim the interest component (business use component) on the loan and depreciation on the unit.

COMMERCIAL LOAN

• • Customer takes title (ownership) of the equipment at the time of purchase.
• • The financier takes a mortgage over the equipment to secure the loan.
• • The customer can claim the interest component of the loan and the depreciation of the equipment as a tax deduction.
• • Deposits and balloon payments can be factored into the loan contract.

Loan contract terms for all equipment finance products generally range between 12 months and 60 months (in some cases the term can be extended to 84 months). Loan terms are determined by the class of asset, the effective life of the equipment and the credit position of the borrower.

Assets are by and large classed as either primary, secondary or tertiary. A primary asset is one that has a long effective life and is considered readily saleable i.e. motor vehicle. A secondary asset is one that has a reasonable effective life however may not be as readily saleable as a car i.e. truck, cement mixer. A tertiary asset is classed as one with a small or non existent secondary market or an asset with a high obsolesce risk i.e. computers, retail fixtures and fittings.

A primary asset would therefore be funded over a longer term or with a higher residual or balloon value whilst a tertiary asset would attract a shorter term with the minimum residual value or a fully amortising term.

Example

Product Lease

Equipment Motor Vehicle

Term 60 months

Residual 30% of the cost price

Example

Product Commercial Loan

Equipment Computer

Term 36 months

Balloon nil