7 facts to know about equipment loans in Australia before you commit to one

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Lockdowns have left Australian SMEs in a precarious state. Stimulus certainly papered over the cracks, but the economy is yet to fully pick back up. Australian businesses have been turning to quick financing solutions to help with cash flow, with banks struggling to facilitate the large demand for credit. Equipment loans are different to ordinary loans and have been a key focus for firms looking to resume operations now that lockdowns are easing.

Equipment loans are essentially loans that are designed for the purchasing of equipment. Because of this, there are some unique benefits. Here are seven facts about how equipment financing works to help inform a decision on whether it’s right for your situation.

The equipment itself is the security

When seeking out a loan, a large part of the consideration is security. Having personal assets as collateral can jeopardise your life outside of work. Alternatively, having an unsecured loan often comes at an extremely high cost.

Equipment loans are different – the equipment you’re purchasing is the security. This means that only this asset that you otherwise wouldn’t have had is under threat of repossession. However, this security means that your risk profile is now lower than an unsecured loan, meaning it’s often lower in interest.

Of course, this can mean you don’t actually own the asset until it’s paid off. Sometimes you do, though, and either way, you may not have the equipment without the financing. This is comparable to vehicle financing, in which the lender is somewhat under control of the vehicle still. 

Keep this in mind, as it may mean the lender has some influence over the usage of your new equipment. For example, it may have to remain within the same country and be maintained thoroughly – because if not, this asset is falling in value, which the lender finds risky.

Interest rates vary a lot

Equipment financing interest rates vary quite a lot. They’re not like a bank loan, which is often within a fairly narrow (and cheap) range. Interest rates for equipment financing tend to range between 5% and 15%, though it of course depends on the financial situation of the borrower.

Initially, this may sound expensive, but it depends on the context. For example, it’s going to be highly likely that it’s cheaper than a business line of credit, a merchant cash advance, and an unsecured business loan.

Whilst it will be more than a bank loan, it’s not the same thing. Credit requirements are lower, the cash is funded faster, and the asset security is much less of a threat to you than what a bank will ask for. Though, it’s best to get a free quote before assessing costs, as interest rates may be twice as much from one business to the next.

Loan approvals are rapid

Equipment financing isn’t just about an alternative form of security, it also lives up to the reputation that alternative online lending holds: rapid approval. Generally, companies like Finance One, EarlyPay, and other online lenders will give a verdict within 6-48 hours. 

So instead of various bank meetings and waiting a month for a verdict, this is seen as rapid financing. Of course, the funds will likely have to be used for the equipment and nothing else, given that the lender will make sure their security asset exists.

This is promising though for Australian businesses that are struggling with cash flow. Expanding or diversifying revenue has been an important strategy during lockdowns and the ever-changing environment we live in. Having the possibility of quick financing is reassuring, and much more useful than traditional loans in the event of emergencies.

It can be better than leasing – but double-check!

There will always be a debate between leasing and financing when it comes to equipment and cars. There is no single answer as to which is best, so it’s best to consider your own situation.

Generally, if the equipment is needed for more than a few years, leasing makes less sense as you will never stop paying. For example, a car can last well over 10 years, so leasing for 10 years is going to cost more than financing it across 4 years; especially when considering the car will become an asset on the balance sheet.

Of course, depreciation and other factors need to be considered. If you’re looking to upgrade and swap equipment frequently, then leasing may make sense. Plus, the lender may maintain the leased equipment for you – such as free tire replacements for a car. Generally, you will have more freedom over your use of financed equipment than leasing, because at some point you will own it (sometimes instantly, sometimes after the final repayment).

The equipment can pay for itself

It’s important to consider the new cash flow when assessing the repayments. For example, a farm acquiring more equipment may be able to yield more harvest. The extra cash generated should be factored into the repayments of the loan, because it may be that the extra revenue more than covers the interest payments.

This is a situation where the equipment pays for itself, and eventually, when the loan is fully repaid, there is even more profit generated from the new equipment. Leveraging investments, whilst having some risk, shouldn’t just be seen as a cost. Instead, it’s a very important tool for business growth. Bootstrapping a business with no gearing is often a mistake that can lead to stagnating and being uncompetitive in the market.

Of course, each and every situation is dependent. We can use financial calculations to help assess the profitability of our capital investment. We can use a mixture of cash flow, net present value, internal rate of return, and payback period to better understand the viability of expanding through debt. Sometimes, it’s a matter of survival – but never take out debt that you do not believe you can repay. Whilst only your equipment is in jeopardy, increasing your liabilities could quickly cause larger issues with the business.

Equipment financing is a driver of the Australian economy

Equipment financing is in huge demand in Australia. Heavy truck financing has increased 50%  over the past year, whilst light commercials have increased by 187%. In fact, over 27% of Australian SMEs stated their intentions about imminently financing growth with non-banking financial products.

In the US, around 8 in 10 businesses use financing to acquire equipment. This highlights the damage that waiting for raising cash funds can do when wanting to expand – it takes too long and may never happen. It takes capital to generate income, and depending on the situation, the loan repayments are often well worthwhile.

It’s not just agriculture and manufacturing that uses equipment financing

The biggest misconception is that equipment financing is for farmers, factories and buying cars. The truth is that IT equipment is actually the second most commonly financed type of equipment. Beyond IT, office machines, and furniture, there is construction, medical, and logistics.

It’s often something many people do not consider because they’re not buying physical machines. Perhaps it’s an oven, or a new set of computers – almost any equipment can be financed assuming it holds resellable value for the lender’s security purposes.

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