So you’ve decided on getting a new piece of equipment for your farm. Maybe you’ve chosen the make and model, and thought about how you want to make use of the equipment as an investment.
But then comes the hard part – how do you actually finance your new investment? You know that there are different options, but what are they and do they even make sense for your situation?
To help us relate different circumstances we can consider the example of Darrel and Bill – two farmers who both have a need for equipment finance.
Darrel grows wheat on a large piece of land. Bill has a farm that produces all sorts of products, from fruit to corn. Both have a need for a tractor and slasher, as they need to keep the place in order. Both are considering options in the range of $50,000 to $80,000.
Both of these blokes love a good yarn and can usually get a good deal on a purchase whenever they try. But the final price is usually the biggest point of consideration as both have previously purchased with cash – this time around they are both considering finance options to avoid tying up their cash flow.
The reason that they need to be careful which finance option they choose is comes down to cost – how much will this purchase cost over the life of the loan? There are other benefits to be considered besides just the loan repayments, like interest and account fees and charges. There are also tax benefits for different situations and business types to those who are in the position to harness them which can be massively beneficial, so it’s important that they make the right choose for their business type, cash flow requirements, and desired lending outcomes.
The five main types of finance available that these gentleman are considering are also the most commonly available to the majority of people. they are chattel mortgage, commercial hire purchase, leasing, paying cash, and getting a loan from a lender.
Now let’s discuss the finance options. Let’s talk about….
Choosing the right finance option for farm equipment!
Wouldn’t it be easiest to just lease a new one?
Leasing arrangements involve a lender or financier, who can be a bank, finance company, dealer, purchasing the equipment. The equipment is then ‘leased’ to the business over a fixed term. The repayment amount is fixed together with the interest rate. This offers predictability and the option to plan the expense around your cash flow. Another advantage of leasing is that the repayments can be claimed against your taxed amount.
One important point to consider is depreciation is that there are no allowances made for depreciation between a lease, hire purchases, chattel mortgages, or an overdraft finance option. So as there is no option to claim for depreciation of the item, as small business owners with under the $2,000,000 of turnover the boys in the article could claim tax deductions against the repayments of a lease agreement.
Consider this – Darrel has a large crop come to harvest and secures a great price to a big Aussie flower maker. He is now flush with cash. If he was to find a suitable lease agreement, make a lump sum deposit to cover 12 months worth of repayments, and then claim those lease payments on his mid-year tax return. This sets him up for something like 35-40% of that claimed amount as a tax deduction with a very fast return, which knocks the socks off of the 15% item value depreciation claimable as a tax deduction in other forms of finance.
Bill doesn’t quite have the spare cash available so he won’t be able to get the benefit of making such a big deposit, so he might be more likely to consider other options.
If you choose to go for a lease you have to be careful to line up the guidelines of the tax guidelines match up with the residual value of the item. This is important because there is a minimum percentage claimable which can be different depending on the asset type and lease time period.
Darrel will have to be careful to plan ahead for his repayments and match them up with the cash flow of his business. While he should also be mindful of the interest rate of finance he can generally be sure that it’ll be cheaper than overdraft facility from his bank.
While Bill might appear to be missing out in this situation he does have other options. He could choose to go with a hire-purchase or chattel mortgage he could get a 10% refund on the GST cost on his first business activity statement (BAS) that comes after the purchase.
What is a Commercial Hire Purchase?
People often get commercial hire purchasing and chattel mortgages mixed up. But while they are similar they aren’t the same kind of finance. They are both however suitable for any kind of business that wants to keep their cash flow free. They allow the purchase of equipment or machinery that will be used in the process of generating a business income. At the end of the agreement they will also own the asset.
Commercial hire purchase is unique in that the lender or financier owns the equipment while the borrower rents the equipment for the length of the agreement. Once the agreement is over and all repayments have been made the borrower is automatically transferred ownership of the item and becomes it’s new owner. This means it can’t be listed as an asset until the agreement has been completed.
A commercial hire purchase agreement is treated as notional loan. This means that the purchase will attract 10% GST on both the equipment’s value and the financed value of the commercial hire purchase. So depending on how your business treats GST, as in whether it’s accrued or on a cash basis, your tax deduction ability will be either all or some of the agreement’s GST amount in the next business activity statement.
Extra benefits can be harvested from the repayment structure chosen, which can be either regular weekly, fortnightly, or monthly, or your choice of lump sum repayments. This allows you to choose how the agreement will impact your cash flow. You may also be able to claim deductions for depreciation and interest, so be sure to check with your accountant.
‘Mate, just get a chattel mortgage!”
Chattel Mortgages are another option where the lender finances the purchase and the borrower becomes the owner of the machinery when its purchased. The lender or financier, of which there are several types, pays the seller of the equipment who can be a dealer but may be a private seller, and holds the mortgage on the item.
Darrel has a turnover greater than $75,000, so he has registered for GST. This can allow him to claim a deduction on the GST included int he sale price of the machinery. As a general practice the interest on the finance together with the asset’s depreciation are tax deductible. This varies on the amount that the equipment is used for the business, but considering that this mowing equipment will be used to clear needed space for the business it will probably be near 100%.
Bill can ride the wave of success and use his harvest money to fund his purchase and ideally make bigger repayments to pay off the loan more quickly. It would be in his interest to do this as this will decrease the amount of extra money it actually costs in interest fees.
Paying for machinery with savings or cash –
If you have the money available then paying cash is an option. But the problem with paying cash is that it can tie up your money and potentially severely interrupt your cash flow and your ability to pay for things.
Think about what that money could be doing – could it be used to make more money? Is it needed as a safety buffer?
It is always wise to keep some liquid money on hand – the blokes should avoid tying up all of their dollars in assets, as assets can often be hard to move quickly. The result could be missed opportunity and potentially difficulty as they seek alternative finance, such as an overdraft, which may have a higher rate than another type of finance.
Why not just get a loan from a lender?
Getting a loan for a sum of money is truly the most flexible option available, which is why it’s our personal favourite at Equiplend.
When you work with a non-traditional lender your options open up immensely. They usually have loan options specifically set up for the type of equipment finance you need. You can often negotiate your loan terms and conditions too, which gives you the option to find and shape a deal to what really suits you.
For a lot of people non-traditional lenders also offer a financial lifeline that enables them to get finance despite being declined by a traditional lender such as a bank. And if they’re not declined, they may be offered a really high interest rate due to past financial problems, such as unpaid debts, bankruptcy, or a bad credit score.
Many people assume non-traditional lenders will also impose high interest rates but this is not always the case. In fact they can be very welcoming as they want to have your business and so they are prepared to work with you more often than not.
The trick to finding the right non-traditional lender is of course to shop around. But with so many options on the market it can be overwhelming and massively time consuming, as not all lenders will be able to accommodate certain situations.
That’s where using an expert finance broker like Equiplend can be exceptionally beneficial. Say that Bill contacted Equiplend and told us he needed a loan for this $75,000 to cover the equipment, get insurance, maintenance and extras he has in mind. After collecting his financial info the team will then match Bill with the best options from the whole market that meet his needs. Of course we are mindful to only show the best deal available for his situation. The result is a flexible loan with a better rate than traditional finance that can be spent flexibly and freely, with total control over what is purchased and when. This is happened because as experienced finance brokers we have over 35+ different lenders that we work with, which means there are 35 different options available!
Besides getting a great rate and flexible deal, the most notable part about this option is that unlike a lease, hire purchase, or chattel mortgage, it allows the consumer to pay out the loan early. There may be a fee for this but it is not always the case, and even so paying out the loan early can still be a great strategic move. The simple reason is that paying out the loan more quickly will save paying extra interest on the borrowed amount, especially if it’s over a long period of time as it can and will add up.
So, what machinery finance option should Darrel and Bill choose?
Really there is no one single answer that makes the decision easy. Every situation needs time and understanding, especially when there are large amounts of money involved as these large amounts can be costly to obtain.
The best way for the blokes to start would be to explore their options and get a feel for what is available. Consulting their licensed accountant is the next step as they will be familiar with your finances, books and obligations. Your accountant can also advise you on whether you are able to make use of any tax deductions and/or small business concessions as they will be intimately know about your business.
Then get in touch with a finance broker like Equiplend – it might sound like a shameless plug, but we back our service so much that and believe in what we do that we can confidently say so. There’s no better way to get a such a great range of choice, a better deal on your interest and repayments, all with personalised service to back it up.
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