As business machinery and equipment continue to advance many businesses may find themselves needing to upgrade to newer, high-tech equipment to remain competitive.
Constantly buying new business machinery and equipment at full price to be in a better position than the competition can take a toll on your finances.
Maximising the value of your business’s machinery and equipment is important to remain relevant within your industry.
In this quick read, explore various ways to maximise the business machinery and equipment you have, borrow funds for leasing, and make this new equipment last.
How To Maximise Equipment Financing
Equipment financing refers to receiving financial support for physical assets, like heavy machinery, a vehicle, or new equipment. Anything that can positively impact a business’s needs and facilitate growth is considered an asset.
Equipment finance is typically in the form of a loan, where a finance agreement is made between the borrowing company and a lender, such as a bank. They are alternatively called “hire purchase,” though they share the same definition.
A hire purchase can help increase cash flow by giving access to operating leases for certain machinery, but the borrower generally has to repay the costs over the loan term, which can be a relatively long period depending on the agreement.
By receiving tangible personal property, the quality of the business machinery and equipment can improve, generating more working capital.
To maximise equipment financing, first, identify what commercial equipment you need. Next, detail the expected lifetime of the equipment, the necessary tools to maintain them, and how it impacts the business’ income.
After choosing the exact assets and machinery you need, it’s time to pick the right financing option for your business.
1. Choose The Right Financing Option
Equipment finance may have different types, but it’s usually used for equipment loans or a hire purchase agreement.
These loans use the equipment, vehicles, or any included asset as collateral to secure the loan. The business usually receives borrowed funds to purchase assets, and interest is included in the loan.
However, since the vehicle or machinery is considered collateral, the lender can seize the asset if they fail to meet the monthly repayments.
Equipment leasing
Another option is through equipment leases. This option allows businesses to use machinery and equipment without purchasing it outright.
They can range from short to long-term loans and may offer more flexible payment terms, like reduced monthly payments.
Chattel mortgage
The opposite of this option is a chattel mortgage, where the business owns the vehicles or equipment immediately. They are typically lower than an unsecured business loan, and there may be a tax deduction on depreciation.
Whether you choose an equipment loan or a chattel mortgage, keep these factors in mind while considering your finance options:
The type of business equipment you can receive
Whether you need to own the machinery or not
Lease costs and repayment terms
Next, negotiate the terms of the agreement.
2. Negotiate The Terms
As you improve your business machinery and equipment, you will typically come across various conditions and terms. However, negotiating with the lender can still be a good idea to potentially lower the short-term cost of purchasing the equipment.
One way to do this is through a balloon payment. A balloon payment works by lessening the cost of the monthly regular repayments in exchange for a larger final payment at the end of the loan term.
Another key element to look out for while negotiating terms is the asset’s life. Some equipment lasts between one and five years, while others may last longer.
To make the initial expenses worth their money, business owners may find it beneficial to check if the available asset lasts long enough for their business to gain benefits.
Equipment finance also includes keeping your company’s creditworthiness and financial records in mind.
Ensure you have a sustainable cash flow to afford the lease, replacement parts, and other expenses, which can help you avoid a bad financial situation.
3. Take Advantage Of Tax Benefits
A key advantage of using equipment financing to improve your business machinery and equipment is its tax benefits.
Usually, this business finance strategy may allow tax deductions, allowing businesses to deduct the purchase price of assets, vehicles, or other equipment from their taxable income.
This advantage is especially helpful for companies who wish to focus on efficiently using their profits.
After you have checked your tax benefits, keeping a consistent maintenance schedule is a helpful strategy that could potentially increase the value of your business machinery and equipment alongside other assets.
NOTE: It’s best to consult the Australian Taxation Office for more information about how much of a tax deduction your business may receive. Getting independent tax advice from registered lenders or financial experts regarding potential tax deductions may also help.
4. Make A Complete Maintenance Schedule
For example, say you were able to purchase the lease for a new asset, such as a new machine with updated systems.
Though this purchase can boost company profits, overusing or neglecting to properly maintain the equipment may cause it to break before its lifetime ends.
When this happens, your company may be pushed to make a more costly purchase to fix the machine.
To avoid this potential issue, plan for equipment depreciation by keeping a regular schedule for maintaining all equipment.
Used equipment is especially susceptible to damage, which can possibly impact your business’ finances.
One way to ensure all equipment stays up-to-date with the latest systems is through properly coaching your staff.
5. Teach Your Staff
Coaching your employees on properly handling the business machinery and equipment they operate is integral to making the lease last.
For example, in-depth training on using, maintaining, and repairing the equipment could help them operate normally over time.
Inviting specialists can be another helpful investment that increases asset value and business finance.
Factors To Consider When Getting Equipment Loans
Before you begin a loan application for equipment loans, note these factors that may affect the asset, repayment terms, and loan amounts you will receive:
Purpose of the loan
Available asset or equipment type
Repayment terms
Interest rates and fees
Secured or unsecured loan
Lender’s reputation and experience
Creditworthiness and finance health
Application timeline
Tax implications
Conclusion
Maximising the value of your business machinery and equipment can be accomplished through various steps, from picking a suitable financing option to negotiating the terms and coaching your staff.
Remember to note the repayment terms and maintain the borrowed machinery regularly.
To discover how equipment finance and other business loans might help boost your business, visit Lumi to explore bespoke loan options that suit your needs.
Got more questions? Reach out to our team via phone at 1300 005 864 or email sales@lumi.com.au. If you’re ready to apply for a business loan, click here.
