The Pros and Cons of Equipment Financing in 2022

  • 14 July, 2022
  • Sharon Piening

With interest rates rising, and uncertainty around the near- term outlook, it can be tempting to put off Equipment Financing decisions.

Supply chains have been disrupted, interest rates are rising, and business input costs, particularly petrol and gas, are increasing.

In these circumstances, it is easy for business owners to delay purchasing the equipment they need. However, is that the right decision?

While we don’t have a crystal ball, or all the answers, we have provided the following information to help business owners with their Equipment Financing decisions.

Equipment Financing - Higher Interest Rates

Recent sharp increases in interest rates, have made the cost of Equipment Financing higher than the emergency level rates we experienced over the past few years.

Whilst it is possible to adopt and “wait and see” approach regarding interest rates, until inflation is contained, they could go potentially move higher.

A major benefit of Equipment Financing is that both the interest rate and repayments are fixed. This provides greater certainty and makes budgeting easier.

Also, because as a Finance Broker we have access to more 50 Lenders, you can peace of mind knowing that the rate we obtain, whilst higher than 6 months ago, is truly market competitive.

Equipment Financing - Return on Investment

Although the cost of Equipment Financing is higher, the interest rate should not be the driver of a purchasing decision.

Rather, the key is to ensure you can make a satisfactory level of return on the investment:

  • What benefits do you expect to derive in $ terms? Are they sustainable? Do they make the investment decision worthwhile?
  • What are the costs/downsides of not making the purchasing decision?

What About the Economy?

With all the gloom and doom in the media, it often seems the easy answer is to forget financing equipment and do nothing.

However, what are the consequences of doing this if the economy starts to falter?

In a down market, customers focus heavily on price and demand more, faster turnarounds etc.

If you don’t have access to the latest equipment:

  • How will you maintain your productivity and margins?
  • Could you meet customer demands for lower prices, higher quality, and faster turnarounds?
  • Will the cost of maintaining and repairing existing equipment, be more expensive than it would be if you purchase and finance the equipment you need?

(In addition to the foregoing, it is wise to ensure you have a sufficient buffer to ride out any economic downturn or reduction in sales. If nothing else, doing this work gives you peace of mind and helps you sleep at night!)

Can You Afford the Repayments?

A common mistake we see in Equipment Financing, is failing to ensure loans are correctly structured and aligned to a business’s cash flow. This is especially true for larger, more expensive, purchases.

It is not enough to look at your Profit and Loss and say, “Yes we can afford it”. The loan structure must also take into account:

  • All other financial commitments you may have (Both business and personal. Their repayments and timing)
  • Seasonality where applicable
  • Sufficient time for installation and commissioning before repayments commence

(It also provides the opportunity to address, in advance, elements within your business/finance that may be of concern to Lenders to achieve better pricing, terms and conditions)

Choose the Right Product

To ensure you enjoy the full ownership, depreciation, and tax benefits, it is important to choose the right product at the outset as mistakes are expensive to unwind.

The two most common options include:

  • Chattel Mortgage – you own the asset and to the extent the asset is used for business purposes, you may be able to enjoy, GST, depreciation & tax benefits – this includes the Instant Asset Write Off Scheme which has been extended to June 30th 2023 which potentially offers significant tax advantages in year 1
  • Rental – you rent the asset from the Lender. To the extent the asset is used for business purposes, you may be able to claim the rental as a tax deduction

Get in Touch to Learn More

In times of uncertainty taking on additional financial commitments can be daunting.

However conversely, not purchasing the equipment you need also involves risks.

While interest rates have increased, as stated earlier, the interest rate should not be the primary driver of a purchasing decision. It is just one element that needs to be considered.

Of greater importance is the return of investment the equipment will deliver and whether or not the business can meet its financial obligations, not just today but also in a more challenging environment.

If you like to discuss Equipment Financing or want a highly competitive quote from our panel over 50 Lenders, don’t hesitate to get in touch.

Sharon Piening

Equipment Finance Specialist

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