For any business acquiring the right equipment or vehicles at the right time can be challenging and a major burden on capital. The latest technology and matching equipment to evolving needs, effective equipment financing enables companies to be more responsive to a changing business climate.
At AFNCF we assist customers to evaluate their business requirements, technology investments, and obsolescence risks to assess the overall advantages of the various types of asset financing.
Rapid technological change means that high technology equipment may become obsolete within 1 - 3 years. Other goods such as large printing presses may have a working life of 20 -30 year, have held their value well in the past However, rapidly changing technology now means that their value will drop very quickly.
Taxation - tax considerations play a major role in determining the choice and structure of a facility.
Ownership - Is ownership at the end of the term important? - If the vehicle or equipment is to be upgraded or sold at the end of the term seriously question whether ownership is important. Perhaps operating lease (rental) may be a better option
Look outside the box – your business bank may not be the best option
Conserve Existing Finance Lines - Wherever possible you should fund your vehicles and equipment on a standalone basis using sources other than your core business bank.
The major banks offer competitive rates on equipment finance - however their documentation also allows them to cross collateralise the debt and all monies clauses, indirectly tying your vehicle and equipment contracts to your home and business loans. If you have your vehicle and equipment finance funded by your primary business lender it can adversely impact your business working capital borrowings.
For example, a $300k specialised CNC machine with a limited resale market may be deemed to be a “tertiary security”, and require a 30% deposit if funded on a standalone basis. Your bank may agree to provide 100% funding because it holds mortgages over your real estate. The downside is that you have utilised $100k of your lending limit – and this amount is no longer available for working capital.
Conserve cash reserves. Financing your equipment and vehicle purchases allows accumulated cash to be used to fund your daily operations, expand your business, buy your premises etc. If there is no ready secondary market for used goods the traditional approach is to require a significant deposit (30% of more) of collateral security. In many cases the equipment purchase can be funded 100% by operating lease with an option to buy / upgrade/ extend at the end of the initial term.
Match your finance facility to your cash flow - Vehicle and equipment finance facilities are usually fixed rate / fixed term, and ensuring that the facility is correctly structured is critical. Vehicle and equipment finance facilities can be structured to suit your business cash flow, and include seasonal payments or payment holidays to cover periods of lean income. It is also vital that the end of term payment matches or is less than the realisable value of the vehicle or goods.
Match the facility to the effective working life of the asset - It’s important to match the term of the finance facility and the balloon or residual value with the working life and market value of the item at the end of the finance term. As an example the maintenance costs increase and the value of cars decrease more quickly after 100,000 km. If you travel 25,000 kms p.a. the maximum recommended term would be 48 months.