Equipment Finance is an important option for most businesses. It provides the opportunity to finance key income producing assets without interfering with working capital or tying up additional assets as security. However, it’s important to choose wisely when selecting the financier and structure which will best suit your business. Here are the top 5 common mistakes made with equipment finance:
1. Solely Focusing on Interest Rates
Making decisions based solely on the advertised interest rates doesn’t let you make an informed decision. Most of the advertised rates are misleading and don’t include things like dealer fees or monthly fees.
When comparing finance options, make sure you’re comparing the monthly repayments and total repayments over the life of the finance term (including all fees), and not just the advertised rate.
2. Not Structuring Finance to Suit Cash Flow
Every business has different cash flow cycles — e.g. seasonal fluctuations or project-based income. It’s possible to match your finance repayments to your expected revenue over the life of the asset.
Common methods of structuring repayments include paying back GST when you receive the input tax credit, residual payments, or larger seasonal repayments. The right finance structure is key to managing your cash flow.
3. Overlooking Upfront and Ongoing Fees
Upfront establishment fees, dealer fees, monthly account-keeping charges, early payout penalties — these can be hidden and add to the total cost. In some cases, what looks like a good, advertised rate can be outweighed by high fees hidden in the fine print.
Again, it’s essential to compare and understand the total cost of finance over the life of the loan. Additionally, if you think you’ll be paying out finance early, it’s important to let your broker know, so that when selecting a financier, the financiers who provide the most favourable payouts can be selected.
4. Not Understanding the Security Being Taken
It’s becoming more common for some financiers to add clauses in their T&Cs. Always look out for:
• Caveat Clauses – allowing financiers to lodge a caveat over real estate in the event of a default. Even if that property wasn’t specifically offered up as security for finance.
• General Security Agreements (GSA) – allowing the financier to register a GSA over your business. This should be avoided wherever possible.
• Negative Pledge – a clause limiting your ability to obtain future finance without the financier’s specific approval. This has implications for you to borrow in the future.
5. Choosing the Easiest ‘Low Doc’ Option
Aiming solely for a ‘low doc’ finance option might sound like the fast and easy solution to acquiring equipment finance, however they aren’t always the best option available. Finance rates and structure can often be more favourable with the financiers that require additional information.
We are here to support your business.
Please speak to us about all things finance. Whether it be Equipment and Automotive Finance, Working Capital Finance which includes Debtor and Trade Finance, Property Finance including Construction Finance, Insurance Premium Funding. And yes, we also do Home Loan Finance.
We know that banks are becoming more selective and treating business customers worse than ever – please make us your first point of contact every time – we will get you a better outcome with a far better experience.
Please feel free to call us to chat about any of the above or get in touch via email:
Andrew Sutherland
0407 746 474
andrew.sutherland@halidonhill.com.au
