As a business owner, it makes sense that keeping income producing business equipment up to date is key to your efficiency and driving revenue. As technology develops at a faster rate, so too does the need for your business to regularly reassess revenue-generating assets in order to remain competitive.
On the other side of the coin, you can also see that regularly upgrading equipment means continual investment. It means locking down working capital in purchased assets which may become obsolete, hard to sell or costly to dispose of.
Fortunately, there are asset financing options to help you both increase productivity and free up cash. We’ll look at Michael’s business as an example.
Michael owns a commercial carpentry contracting business. He’s looking to add three more vans to his fleet in order to begin servicing new areas. He wants to take advantage of dealership sales, but does not want to tie up his working capital in multiple assets. He opts to finance each van with an equipment and vehicle loan, where the assets act as security for the loan. This way, Michael can instantly write-off the vans as they each fall under the $20k cut-off for the Instant Asset Write-Off Scheme whilst maintaining working capital in his business.
There are a number of approaches that, like Michael, you can take in financing equipment or vehicles:
A finance lease means that the lender will purchase the equipment on your behalf. You will then pay the lease in instalments over a period of time. At the end of the lease you have the option of purchasing the asset (for a residual amount agreed at the beginning of the lease), trading in the asset for new equipment or simply ending the lease. If you look to purchase at the end of the lease, there is a risk that the asset will be worth less than the residual value.
Tax-time benefits of a finance lease:
- Generally, you can claim the lease rental as a tax deduction
- The lender pays the GST component, making your repayments lower
An operating lease is best for equipment that becomes outdated quickly, for example, in information technology or health industries. Jonathan Raymond, Director of LendingPro, advises, ‘An operating lease is ideal for equipment that needs regular replacement and reduces the risk that you will end up owning obsolete technology. At the end of the lease period, you simply return the goods to the lender. Unlike a finance lease, the risk of the market value being less than the residual value lies entirely on the lender.’
Tax-time benefits of an operating lease:
- Claim the full lease payments as a tax deduction, meaning you could pre-pay a portion of your lease before June 30, 2018 to minimise you taxable income
- Like finance leasing, your repayments will be lower as the lender pays the GST component
Equipment and Vehicle Loans
Otherwise known as a Chattel Mortgage (a “chattel” is a moveable asset). An equipment or vehicle loan means the lender provides you the finance to purchase the asset which you will then own. The asset also acts as security for the loan, meaning there is less documentation and often no down payment required.
Tax-time benefits of equipment and vehicle loans:
- Claim the interest payments on the life of the loan
- Instantly write the asset off with the Instant Asset Write-Off Scheme for assets under $20k. There is no limit to how many times you can claim under the scheme
- For assets over $20k, claim depreciation on the equipment as to how it’s used in your business
Consider doing an assessment of the equipment necessary to creating revenue for your business. Can you foresee it, or is it already, outdated by new models or technology? Are there new tools to do the same job more efficiently? And what sort of assets or equipment are your competitors using?
By utilising asset finance you are not limited by available cash in your business, meaning you are able to have an agile response to developing technologies in order to provide a competitive offering. You are also able to work smarter with what working capital there is by bringing forward deductible expenses. Each business’ needs are individual, FundingPro can help you determine what sort of asset finance can work for you. Learn more about Equipment Finance, apply now or call 1300 998 555 to speak to a specialist loan advisor.
The information in this article is of a generalised nature, it is important that you obtain individual financial advice for your own small business.