With pandemic financial support for businesses being wound back or discontinued, many businesses will be reviewing and assessing their balance sheets and cash flow situations. Keeping a positive bottom line with rising costs of materials and supplies and other impacts and cash flow negatively impacted due to the pandemic can be a major challenge.
Businesses may be taking a ‘whole of business’ approach to the process to see where they can reduce expenses. One area where Jade Equipment Finance can assist businesses to reduce their outgoings is in achieving lower equipment finance repayments.
When taking on finance to purchase new equipment, many factors need to be taken into account and our consultants work closely with customers to address every detail in order to achieve the most suitable outcome. While ourselves and most lenders and borrowers focus heavily on equipment finance interest rates, the key to a cost-effective outcome may be in the repayments.
We outline strategies and suggestions we offer for businesses to consider when structuring their finance deals to achieve lower equipment finance repayments.
Our approach takes in all the elements which comprise and contribute, both individually and when combined, to equipment finance repayments:-
- Finance product
- Interest rate
- Finance term
- Balloon
- Choice of lender
Varying one or some of these components can result in lower equipment finance monthly repayments which may provide valuable support for the business.
Finance Product
The choice of finance product impacts the monthly repayment amount because the interest rate is different for different loan types. Chattel Mortgage and Commercial Hire Purchase have the lowest rate, Leasing is slightly higher and Rent to Own higher again.
While the temptation may be to opt for the cheapest rated finance, the overall benefits of each product should also be take into account. These relate to accounting methods and measures and individual business objectives.
A lower interest rate finance product will deliver a lower monthly repayment than a higher interest rate product. But the benefits derived from the higher rated product may be seen as more advantageous to the business.
For a clear illustration of how this works, simply refer to our Interest Rate Comparison Calculator.
Interest Rate
Following on from above, the interest rate is the major contributor to the cost of finance and it follows that the cheapest interest rate finance will deliver the smallest monthly repayment figure. The key figure that many business owners are seeking to achieve. Our continual focus on achieving better and cheaper interest rates for our customers can be the answer to them receiving an offer with that target repayment level.
We achieve the cheapest rates as a result of a number of factors including expertise, longevity and status with the lending market, our vast lender base and the negotiating skills and dogged determination of our consultants.
Rates do vary across equipment finance lenders and this in part plays into our point below on lender selection. The RBA sets the official cash rate and from that banks and non-bank lenders will set the rates they are prepared to offer across their lending markets. These rates take into account their own operational costs and their confidence in specific industries or lender markets.
Getting a lower rate from some banks and lenders is challenging, especially for individual business owners. Some non-bank lenders that have equipment finance as their specialty can tend towards greater flexibility in rate negotiations than say the big banks which are more constrained by their corporate guidelines.
Interest rate variations may appear as miniscule, sometimes a 0.1% difference. But when you calculate that variation over the up to 7 years of the equipment finance term, you’ll realise how significant that can be to your bottom line. Use our Equipment Finance Calculator to see this in action.
Finance Term
As interest is a per annum rate, the length of the loan term will determine the overall cost of the loan. Together, the finance term and interest rate, essentially determine the monthly repayment. So by varying the term, a different repayment figure can be achieved.
- If lower repayments are the target, opting for a longer term may be sought.
- If owning the equipment sooner is the target, then a shorter term will achieve that, but with a higher monthly repayment.
Bring in the cheapest interest with a variation of the loan term through skilful negotiation with the lender, and an optimum outcome may be the result.
Balloon
A balloon (Chattel Mortgage and CHP) and residual (Leasing) are a percentage of the loan amount which is set aside for payment at the conclusion of the finance term. This can be used strategically to structure a finance deal to achieve the targeted repayment amount.
The larger the balloon, the lower the repayments and vice versa. But attention needs to be paid to the value of the machinery at the end of the finance term when the balloon is payable. Lenders may also have their individual approach to what maximum balloon percentage they agree to.
Choice of Lender
As we covered briefly above, the choice of equipment finance lender can impact the interest rate offered which flows onto the resultant repayment. Taking advantage of our broker-style services with access to many including specialist lenders, can ensure the cheapest rate and hence optimum equipment finance is secured.
To wrap it up, to achieve lower equipment finance repayments to ease pressure on cash flow, pay attention to the structure of the finance and each element that contributes to the outcome and utilise a lending expert to assist in achieving the optimum outcome.
For lower repayment equipment finance speak with a Jade Equipment Finance consultant on 1300 000 003
DISCLAIMER: IF MISINTERPRETATIONS, MISREPRESENTATION OR ERRORS EXIST IN THIS ARTICLE, NO LIABILITY IS ACCEPTED. THE INFORMATION IS PROVIDED ONLY FOR GENERAL PURPOSES AND NOT IN ANY MANNER INTENDED AS THE ONLY SOURCE FOR MAKING FINANCIAL DECISIONS. THOSE THAT CONSIDER THEY REQUIRE ADDITIONAL GUIDANCE OR ADVICE SHOULD REFER TO AN INDEPENDENT FINANCIAL ADVISOR.
