5 Guidelines for Machinery Loans & Equipment Financing

Whatever industry you are in, state-of-the-art machinery and equipment can revolutionize your company’s productivity levels, and overall bottom line.

However, upgrading your facilities, or general operations, to incorporate such a change does not come cheap. Indeed, with costs sometimes running into six figures or more, it can often take decades to garner enough spare capital to fund the overheads, maintenance and depreciation costs yourself.

Faced with this situation, you might initially consider working capital loans.

However, machinery loans and equipment financing may well be a much better way to accelerate businesses growth and profits in a more sustainable way.

In this article we will highlight why, as well as outline five guidelines for machinery loans and equipment financing that you should consider before applying for this type of funding.

What are Machinery Loans & Equipment Financing?

Typically referred to as equipment finance, this specialist type of loan allows businesses to invest in the growth of their operation through the purchase of heavy-duty equipment, fixtures or tools.

Commonly, the loan is secured against the assets purchased, and its terms tend to be tied to the life expectancy of the equipment. Usually this covers a period of between 12 months to five years, although for assets like construction equipment, agreements can be made that span longer periods of time.

Equipment finance is widespread in Australian businesses to the point that it funded 40% of the country’s capital expenditure in 2018.

It is used by many organizations that range from start-ups that don’t yet have the funds to buy assets essential to their launch, to established businesses who want to spread the risk over a period of time, that they would otherwise be exposed to if they depleted a large percentage of their cash reserves.

As a rule, equipment financing can take many forms including a chattel mortgage, novated lease, commercial hire purchase, finance lease, operating lease and unsecured business loan. The terms of which might require anything from a lump sum deposit, to fixed monthly payments or a large final ‘balloon’ payment.

What can you buy with an approved equipment loan?

Businesses can use the funds they receive from equipment financing to purchase any tangible asset they need for its daily operations.

Here are some examples:

• Commercial kitchen equipment
• Company cars
• Forklift
• IT systems
• Machinery
• Tools
• Specialized manufacturing equipment

What to consider prior to applying for equipment finance

If you are considering applying for equipment finance, it is worth reading this financing business equipment guide from Westpac.

However, here are five main guidelines you really should consider too.

1. Know the risks

Investing in new equipment or machinery can be a very expensive practice. So, it is important to avail yourself fully of the risks of doing so.

Be aware of how much it will cost not only to buy, but also run and maintain the new purchases, and what effect this will have on your business – especially if production ceases because they need repair.

Insurance and extended warranties are a fantastic way to mitigate risk, so be sure to take steps to cover yourself with both.

2. Assess your finances

Before agreeing to supply you with the funds to buy new equipment and machinery, banks and other financial lending institutions will want full details of your current financial position.

It is worth taking the time to understand that yourself by talking to your accountant and having all the necessary paperwork at the ready.

3. How efficient will you become?

All businesses should strive to be more efficient and when it comes to buying new machinery, this often results in a streamlining of processes that save a lot of time.

However, what your business does with this spare time, and slicker operational capacity, is an important factor in determining whether your business is actually ready for the upgrade in its facilities.

Will having the new machinery attract more sales or customers? Will you have to employ more people to cope with the increase in productivity? How much time will it specifically save? What can be done to increase profitability within the new time available? 

Unless you have definitive answers to those questions, it might not be the most prudent time to overstretch your business with an equipment loan.

4. Constantly look to cut costs

There are many reasons why businesses fail but one of the main ones is over-capitalization. 

If you overspend, you are asking for trouble, so it is always worth keeping abreast of your running costs, expenses and cash flow.

When it comes to new equipment or machinery you will constantly need to keep on top of the costs of running and maintaining it.

Forecast this as accurately as you can to assess the impact new machinery will have on your business and profitability.

Also be sure to talk to your accountant to see if the purchase of the new equipment is tax deductible, and what other tax implications there might be as a result of increased sales.

5. Use an independent finance broker

As mentioned previously there are many different types of equipment loans available. So, when investigating your options, it is worth talking to an independent finance broker.

Finance brokers are experts in their field, with an in-depth knowledge of all types of business loans and very well-established industry connections.

Utilizing their knowledge can save your business thousands of dollars, just by drawing upon it to find the most appropriate and competitive loan for your needs.

As they are independent, they are not tied to any particular financial institution. So they will endeavor to find the best option for you.

Conclusion

Whether or not you decide to proceed with an application for equipment financing is up to you. But before you do it is important to know what you would be getting yourself into.

In this respect, we hope this guide has been useful to you and wish you all the best whatever decision you make.