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Bill Tsouvalas from Savvy talks about leasing options for rail projects.
Rail infrastructure projects are popping up everywhere in Australia, with the trend set to continue under the Government’s Modern Manufacturing Initiative. Industry digitisation and innovation means old equipment and plant are no longer cutting edge. Though your business may be wondering what the next step is when it comes to getting the equipment for the job, you should pause and reflect on the methods of funding your equipment before approaching banks and funding sources.
Leasing vs. owning outright
You can fund the use of equipment in one of two ways: leasing the equipment, which gives you access to equipment for a set period which you then give back or purchasing your equipment with a funds from a loan.
Leases and how they work
Leasing equipment is best for industries that either have set project lengths, such as in rail, or need the latest and greatest tech. In a lease, your business won’t ever own the equipment. This isn’t a downside; it gives you more flexibility. You can also claim claiming deductions on interest and depreciation. You can apply for two kinds of leases – with one being more flexible than the other.
Operating leases give businesses a way to gain access to plant and equipment without owning it outright. You essentially “hire” the equipment by making regular repayments. Operating costs are deducted as expenses and you must return the equipment when the lease runs out. Maintenance and other servicing costs are also included by the lender or manufacturer as part of the lease agreement. The agreement usually states the equipment must be in good working order to be accepted back.
A finance lease gives you an option to buy your equipment at the end of the lease term if you so wish. Your business takes ownership of the equipment if you pay what’s known as a residual value payment. You may also hand the equipment back or start a new lease with new or different equipment.
Bill Tsouvalas, Managing Director at Savvy and business finance expert says a lease can be ideal for shorter-term projects. “Finance leases give your business a view to buy if you believe you’ll make a good investment by putting the plant or equipment on your books. Otherwise, you can hand it back and maintain a lean and agile organisation.”
Purchasing with a chattel mortgage or hire purchase
If your business would rather own the equipment, a chattel mortgage or hire purchase are your best options.
A chattel mortgage is a type of secured loan that gives your business access to 100% finance or more, tax deductions, and other facilities. A rail business can claim GST, interest, and depreciation through activity statements. If applicable, you can also claim via the instant asset write-off. A hire purchase is the same except for where ownership lies: ownership rests with the bank during the hire purchase term instead of with your company.
As for 100% finance, this means your business can borrow more than the value of the equipment. You can pay off extras such as insurance, servicing (which you’re now on the hook for), training, ticketing, transportation, and so on.
“Having an asset on the books is how many businesses would rather operate; and these kinds of loans are cash flow neutral solutions,” Tsouvalas says. “When getting a hire purchase or chattel mortgage, your business won’t have to dip into operating cash or reserves.
“It’s really all up to two factors: how much appetite you have for flexibility and where you want your business to go. You should ask your accountant before making any formal applications.”
This article first appeared on railexpress.com.au
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