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Maintain cash flow while boosting profits? Go on…

January 12, 2019

Whether you’re a sole trader, a small-to-medium enterprise or an international corporation, all businesses need some form of equipment to function – even a humble fisherman from centuries past needed a hook, line and sinker!

But it’s rare in this day and age that the equipment you require to be successful is cheap. In fact, buying and maintaining equipment can be one of the larger expenses in any industry.

Which is why equipment financing has become so popular.

A business bump without the lump (sum)

The major advantage of financing your equipment is that it gives you a lot more flexibility with regards to your cashflow. Obviously a rate of interest is charged on the financing, so it means you will end up paying more for the equipment than if it was purchased outright, however you will also have a stronger cash buffer for those events – events which, more often than not, are unexpected – that require a cash payment.

It also means that at the end of the set period of financing you will own the equipment outright. This gives your business a valuable asset, as opposed to simply leasing the equipment, which would leave you without anything tangible to potentially sell-on at the end of the agreed period.

Of course, the flip side is that if the equipment you require has a short service life, leasing may be a better option – you don’t want to spend five years paying an inflated rate for something that ends up being worthless the moment you take ownership of it.

As a result, equipment financing is generally best used for gear that you know you will continue to get ongoing use out of long after the financing period has finished – or, failing that, it will at least have some value should you decide to sell it.

No ceiling, but a bit of a floor

As far as what you can organise financing for, the sky really is the limit – although there is something of a ground level. Financing won’t be available for relatively low-value items, such as a desk from IKEA (although if you were fitting out an entire office with desks, that’s a different kettle of fish).

Essentially, you need to be financing for equipment that has reasonable value should you default on payments and the financier needs to offload the equipment to ensure they don’t lose out financially.

While some companies will have a lower floor, $5,000 is probably a good amount to consider as the starting point for cost-effective equipment finance. From there, if you have the desire and a viable line of credit, you can finance items that total in value upwards of a million dollars.

Equipment financing tips and benefits

→ More than just cashflow benefits

Equipment financing brings further benefits including:

  • Input tax credits: you may be able to claim input tax credits for the GST included in the asset’s price, and claim the depreciation and interest components of your repayments
  • GST benefits: GST on the equipment purchases is refundable up front in the GST period that you finance the equipment.

 

→ Two (or three, four, five) become one

If you require financing for a range of different pieces of equipment, it’s a good idea to investigate rolling all your financing into a single, comprehensive package. This is primarily due to the fact that the larger the sum you are financing for, the more options you’ll have when organising a deal, whether that’s a lower rate of interest on repayments or more flexibility in your payment plan.