Warren Willams Mobile: 0405 379 345 Fax: (02) 8088 1083 Email: warren@wfinance.com.au Web: www.wfinance.com.au

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Equipment Finance

Let’s start by defining what we mean by ‘equipment’. In the equipment finance world, we mean any asset that is identifiable (usually by serial number, model, description or location), removable (not permanently fixed in), and has some resale value (providing security for the funder). It must also usually have a minimum value of $2000 (you can often bundle small items into one total). So this covers almost all assets that a business would have.

Generally, anything outside these parameters needs another form of finance via other forms of security, but we can finance ‘thin air’ for the right client.

There are numerous methods by which to finance the purchase of equipment in addition to the outright purchase of the asset with cash. These methods include hire purchase, finance lease, operating lease/rental, novated lease, chattel mortgage or a line of credit against your home.

If you purchase equipment through a business you are usually able to claim the GST in your BAS statement. Under each finance method you are generally able to finance 100% of the assets purchase price, but you must consider that each of these finance methods have their own pro's and con's, especially when considering their tax advantages. Note that you can bundle multiple items into the one finance contract – the more you finance, the better the rate (usually). Terms available range from 12 months to 5 years, and sometimes more depending on the equipment. The minimum amount funded is $2000, and there is no upper limit.

There are numerous reasons why you would finance the purchase of equipment. One reason (which is obvious but often overlooked) is to preserve your cash for other activities that may produce income. Another reason is because you utilise this asset for business purposes and are therefore entitled to a tax deduction for the operating costs of the asset, including the associated borrowing / interest costs. Therefore any surplus cash available may be applied against those loans where the interest is not tax deductible, i.e. on the family home, thereby improving your financial position. It is generally considered best to finance an income producing asset over the useful life of that asset.

Once you have decided that the most appropriate way to acquire the equipment is by way of finance, you need to determine the most appropriate type of finance for your individual situation. In all cases the equipment is used as security, and this is usually supported by director’s guarantees. WE DO NOT NEED YOUR HOME AS SECURITY. The following points provide greater detail on each method and the respective advantages and disadvantages. W finance are specialists in all forms of equipment/asset finance.

Commercial Hire Purchase (CHP)

Provides for the financing of the equipment over a fixed term with a pre-agreed payment plan. Upon the final payment, title of the equipment passes to you. You can pay a deposit if you like. You can finance the GST. Some accountants will say that you can claim the full GST amount back in your first BAS return; others say you must claim it month by month throughout the term. Allows you to make pre-agreed balloon payments through the lease generally up front and at the end, although you can elect to have no lump sum payable. Pre-agreed payments and fixed interest rate provides certainty. If you elect to have no balloon payment you are paying off a greater principal component of the loan each month. This reduces the amount of Interest paid [although repayments may be higher due to the additional principal payments). Where the equipment is used for income producing activities, this usage is tax deductible, together with depreciation and the interest component of the lease payment. The equipment is recorded as an asset on your balance sheet and depreciated over time. The full cost of maintaining the equipment is your responsibility. Need to be GST registered.

Equipment Loan (Chattel Mortgage)

Under this finance arrangement the equipment is used as security over the loan via a chattel mortgage. Generally with this type of loan there is no balloon payment at the end of the term, but there can be. Upon the final payment, title of the equipment passes to you. You can pay a deposit if you like. You can finance the GST. This is the only equipment finance mechanism that the tax office has confirmed that you can claim the full GST amount back in your first BAS return, even if you’ve financed GST over the term. Fixed payments and Interest rate provides certainty. Where the equipment is used for income producing activities, this usage is tax deductible, together with depreciation and the interest component of the lease payment. The equipment is recorded as an asset on your balance sheet and depreciated over time. The full cost of maintaining the equipment is your responsibility. If you elect to have no balloon payment you are paying off a greater principal component of the loan each month. This reduces the amount of Interest paid [although repayments may be higher due to the additional principal payments). Need to be GST registered.

Finance Lease

Provides for the financing of the equipment over a fixed term with the final payment representing a residual (RV) payment [usually a % of the value as set by the ATO depending on asset class). Finance Leases must have a residual. Free title of the equipment may not necessarily pass to you once the final payment is made (under the strict interpretation of a finance lease contract ownership remains with the funder). It should be noted that it is common practice across the industry that funders do pass title after all payments have been made. Fixed payments and Interest rate provides certainty. Need to be GST registered. The full cost of maintaining the equipment is your responsibility. GST is not financed. No deposit can be made. The lease payments are usually recorded as operating expenses.

Operating Lease

Also known as Rental. Provides for the renting of the equipment and Includes financing of the equipment over a fixed term. At the end of the rental term you usually have the following options: return the equipment to the funder with no further obligation; make an offer to purchase the equipment at market value; upgrade to new equipment; or keep on renting the equipment, either month by month at the same rate, or over a new fixed term at a reduced rate. The full rental payment is tax deductible where the overall use of the equipment is for income producing purposes. The asset is not recorded on your balance sheet. Fixed payments and interest rate provides certainty. The full cost of maintaining the equipment is your responsibility, unless you choose a fully maintained operating lease, in which case the responsibility for maintenance falls with the financial institution and you are not exposed to unexpected high maintenance costs. There is no pre-agreed purchase price for the equipment. Note this could be advantageous If the value of the equipment has fallen significantly (good for assets prone to technology obsolescence). Some government departments and corporations prefer to have many assets financed ‘off balance sheet’ via an operating lease. GST is not financed, and there is no allowance for a deposit or a balloon/residual. Need to be GST registered. You can often ‘bundle in’ intangible costs such as ongoing upgrades, maintenance, servicing, consumables, software and extended warranties. Software can sometimes be financed stand alone (without the finance including hardware) via rental.

While there are advantages with rental and definite cases to justify its use, our suggestion is use this product with care – there are many institutions and brokers out there that will actively take advantage of clients at the end of the term in order to maximise their income. Talk to us about how best to safeguard your options and minimise costs.

Novated Lease

Usually for vehicles. Under this finance model you lease the vehicle from the financial institution and novate the lease to your employer. Depending on your arrangement with your employer, so long as you are employed there they will make part or all of the payments. Provides for the financing of the vehicle over a fixed term, the final payment representing a balloon payment. Title of the vehicle passes to you once the final payment is made. You have flexibility to take the car with you to a new employer who can execute a new deed of novation. If your new employer doesn’t do so, you are responsible for the payments. Ideal for sales people. Fixed payments and Interest rate provides certainty. Not generally suited to self employed individuals. The full cost of maintaining the vehicle is your responsibility.

Line of Credit (LOC)

Under this finance arrangement you would generally draw down a line of credit against your home or business premises and utilise the money for the purchase of the equipment. As you are generally only required to pay interest on this type of loan, you need to be disciplined! Ensure that you pay down the LOC over a short period of time; otherwise the benefit of a low interest rate is lost. You are able to make additional repayments at any time. Interest rates are generally lower when the line of credit is secured against property. Variable Interest rate - subject to rate changes. The lender will require security over your home, therefore you will need sufficient equity, and this reduces your capacity to use property equity for other income producing activities. It may also restrict your ability to use property equity via other funders. There is usually less tax advantage with an LOC when funding business use equipment. The full cost of maintaining the equipment is your responsibility. GST can be financed. The equipment is not taken as security. You may not need to be GST registered. Terms can be greater than other forms of equipment finance if you choose.

Specialised Equipment Finance

Escrow - provides for progressive draws, often used for fit outs and when equipment takes time to manufacture, and the supplier requires progressive payments. Once the equipment is to be delivered, it converts to one of the finance types listed above.

Letter of Credit (LC) - usually an import lease, the LC facilitates payments to an overseas supplier for equipment to be imported into Australia. Often requires collateral security until the equipment is delivered, after which it converts to one of the finance types listed above.

Specialised Equipment - need something unusual? A $500K machine that puts the correct knot in the string at the end of a yoyo? A $10M machine that apparently builds a better mousetrap? The banks tend to just say no – we tend to say ‘tell me more’, with a view to finding a way to finance what your business needs.

Variable Rate - equipment finance is usually fixed for the term of the facility, however there are a limited range of variable rate products available.

Rate Lock - There are a range of facilities available that allow you to protect yourself against interest rate movements between when you gain the approval and when you take delivery of the goods. This can be particularly useful when financing the import of larger items or when there is a significant manufacturing lead time.

Talk to Kings Catering Equipment about which one is right for you.

'If you can buy it, we can finance it.'