Moving on from consumer finance to small business and corporate finance, we’ll look at the example of purchasing IT equipment. Rental or operating lease facilities are often ideal for these groups as they need to be up to date with technology to keep pace with their competitors.
The rental products available in the market allow the small business to lease (off balance sheet) IT equipment which will no doubt be out of date in 2 to 3 years time. This product allows the business “the use” of the current IT equipment and at the end of the finance term they just hand it back and upgrade to a more current product. A fixed monthly payment is calculated at the time of purchase.
The advantage of this type of lending is that the business can maintain cash reserves for normal trading cash flow rather than using their cash to purchase equipment outright which will be obsolete in a few years time.
Dollar Buy Back
Some financiers offer a $1 buyback at the end of the term which is ideal for items with a life span of more than 5 years; this allows the business to spread the cost over a period of time to ease cash flow.
Rental can be reasonably expensive due to the fact that the items are worth nothing at the end of the term. This is because technology evolves and the financier ends up with an obsolete piece of equipment which they then have to dispose of.
Some of the lenders in this industry are quite switched on and are able to package together say a container full of refurbished second hand photo copiers and send them to third world countries. This also helps the retailers who are trying to sell new product and do not have to compete against their own refurbished product in the market.
The other thing to consider in the current market is that it may be more beneficial to purchase the larger dollar amount items on a Chattel Mortgage and claim the Australian Governments Investment Allowance (in place until December 31, 2009). Your accountant will be able to advise you if this is the best choice.
- The Finance Maze – Chattel Mortgages
- The Finance Maze – Consumers
- The Finance Maze – Cash vs Finance