Article provided by NAB

A case study of boosting productivity and improving the bottom line

Businesses across a broad range of industries are turning to Vehicle and Equipment Finance as a cost-effective way to grow.

As well as providing a flexible form of finance at a time of low interest rates, taking on a vehicle and equipment loan from NAB provided an immediate boost to the bottom line, according to Michael Read, Managing Director of Recyclable Packaging.

Based in Melbourne, Recyclable Packaging delivers 100 percent recyclable and/or biodegradable packaging manufacturing thermoformed coffee cup lids, plates, clamshells, blisters and trays to protect and display products. Its purpose built manufacturing facility currently operates on a schedule of three shifts, 24 hours a day, five days a week. The loan financed a large-scale PET extruder – a machine that can make clear plastic sheets out of recycled Coca-Cola bottles that are used to make clear salad containers and sandwich wedges.

“The loan has been a turning point,” says Read. “We were a fledgling business until we managed to buy first-class equipment that can compete with imports. The finance reduced our maintenance costs when we replaced the older machinery, which increased our productivity. Prior to this, we were importing plastic sheets from various parts of the world but we now manufacture our own at a cost of 25-30 percent less than we were spending. This had an immediate effect on the bottom line, even after the cost of financing.”

Using the asset as security

Using the asset as stand-alone security for the loan was a big part of the appeal for Read as it freed up his equity. “Borrowing money on the asset leaves any equity you have in property free so in the event of an emergency, or if you want to fund something substantial, you can move ahead because you have equity in those other assets,” he says.

Working with Leigh Canet, a NAB specialist in Vehicle and Equipment Finance, was a highlight, says Read. They first met in 2010 when Read was seeking backers to fund his business idea. “Leigh got it straightaway; he knew the potential because he knows the market so well,” says Read. “If NAB hadn’t supported us, the business wouldn’t have got off the ground. We launched in 2010 and our growth rate has been phenomenal as a result of getting finance for tooling and equipment, allowing us to go and chase the work.”

Borrowing 100% of the purchase price

Vehicle and Equipment Finance has many advantages over traditional loans for business owners, says Michael Cutting, Specialised Banking Executive at NAB.

This includes the ability to borrow 100 percent of the purchase price, the fact that the asset acts as security for the loan and that the length of the loan is tailored to the usable life of the asset. Many business owners also appreciate the balloon or residual payment, which reduces loan repayments.

“We take into account the intended use of the asset and how that impacts the effective life to set up a repayment structure that works. This allows the income being produced by the asset to help pay off the finance without straining the cash flow of the business.” says Cutting.

Matching repayments to cash flow

Another advantage of Vehicle and Equipment Finance is matching the repayments to the cash flow of the business to take into account any seasonality in the business.

This is an aspect that Cutting saw to great effect when he worked in Darwin, which has distinct seasons. Tourism operators usually experience an upswing in business during the dry season with demand slowing during the wet season from December to February.

“When we are funding these tourist operators, we look at repayment holidays over that time, so they pay the loan back over the nine months when they have better income,” says Cutting. “It’s a similar story for farmers. For example, in the cropping industry they’ll only get one payment a year when their grain goes to market so we organise for an annual instalment. For a business that’s starting up and putting in a new equipment line, we might start with a low repayment schedule for the first six months while the efficiencies are fine-tuned and building the equipment to produce at full capacity.”

Broad range of plant and equipment covered

While there’s widespread awareness about Vehicle and Equipment Finance among SMEs, Cutting says people aren’t always aware of the range of things that can be funded by this type of loan thinking their equipment is too specialised to qualify. What’s covered is just about anything labelled as a chattel – anything movable, depreciable and identifiable.

“My preference is to start at yes and work out the way to go forward,” he says. “We finance a lot of specialised equipment for the right customer in the right situation. Another misconception is that people don’t realise you can fund 100 percent of the purchase price; people think they have to put equity into it, they can’t believe that we’ll fund the whole amount.”

As Australia’s largest business and agribusiness bank, NAB knows and understands a broad range of industries and working business assets. The bank has provided Vehicle and Equipment Finance across transport, materials handling, manufacturing, farming and agricultural, health, medical, aviation, rail, IT and communication, education, construction, mining, marine and energy.

Tailoring solutions to the individual business

NAB’s approach to vehicle and equipment financing is to gain an in-depth understanding of their customer’s business and offer a tailored solution. It also makes the process as easy as possible with a pre-approved limit in place so loan recipients can negotiate with suppliers with more confidence.

“This is complemented with a master agreement with all the terms and conditions in it, taking away the need for lengthy documentation each time you buy which can make multiple plant and equipment purchases even faster,” says Cutting. “Customers who order equipment but are awaiting delivery can be vulnerable to interest rate fluctuations and NAB’s rate lock product lets them lock in a rate, taking away the uncertainty of interest rate changes and the potential impact on their repayments and cash flow.”

Find out more about vehicle and equipment finance.

Important information

Any advice contained above has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, NAB recommends that you consider whether it is appropriate for your circumstances and that you review the relevant Product Disclosure Statement, Terms and Conditions or Financial Services Guide.

© National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.

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