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Getting Equipment Finance Right
Arranging commercial finance can be a daunting task for many businesses. Here are some suggestions from Interlease to make it easier.
Access to sufficient working capital is the most important component for almost every business.
Reduce limitations during business growth phases
Due to cash-flow, carefully consider what funds are used to purchase capital equipment
Choose the optimal structure and term when securing financing capital equipment
Choose the option that will best match equipment finance cost with the income from the asset.
Income may be seasonal or vary across the life of the asset
Make sure the finance can be structured to suit the expected income
Some assets will become obsolete quicker than others
Take in to account each asset type when financing, some become obsolete quicker than others
Different assets are deemed to have different depreciation rates
Tax effectiveness of capital equipment is dependent upon finance structures
Things to Consider when Seeking Funding;
1. Banks are Looking After Shareholders
When seeking funding from banks, carefully consider their job is to provide the best outcome for its shareholders and therefore they seek to obtain the maximum amount of security it can for each dollar it lends to you. When real estate is used as security, seek to have security released once your financial position changes. There is a rule of thumb that continues to remain true “use anyone except your bank to finance capital equipment.” It is vital you only use available funds for working capital and not to purchase equipment.
2. Avoid Over Exposure
Don’t over expose yourself to any single financier. This has the effect of limiting the funds to you. As your exposure increases with any one financier, that lender will increasingly want to dictate terms such as how and when you repay the debt.
3. Understand the Charges
Finally beware the ‘fixed and floating charge’. Most businesses in Australia are required to provide fixed and floating charges (debentures) to their bank to secure ongoing banking lines. Many business owners don’t truly understand what this means and what control this gives the bank over their business.
4. Consider all your Options
Don’t restrict yourself to just one bank or equipment finance provider who will want to restrict you to their buying criteria.
Make sure you have access to a range of finance providers so you can choose the best option for each equipment type and your needs. This will give you not only access to funds, but also the ability to choose the structure you want for each machine.
When importing equipment, ensure the financer can pay deposits and progress payments to the overseas suppliers without the requirements for security or the need to use your overdraft.
Resist the urge to put all your eggs in one basket.