Financing equipment for your business doesn’t have to be complicated. Here’s what you need to think about first.
Given the high upfront cost of buying vehicles, trucks, trailers or buses, financing is a popular option for businesses in the transport and logistics industry.
For Glenn McIvor, co-owner of Victorian Touring Coaches, using trucks, trailer and bus financing was the logical choice to fund the company’s fleet of luxury coaches. Specialising in senior and sporting clubs, schools, universities and corporations with charters, extended coach tours and snow trips, the business launched 60 years ago and has 30 vehicles on the road – 11 of which are funded through trucks, trailer and bus financing. Typically he’ll take on a loan for seven years and then sell the vehicle.
The pre-approvals process means that McIvor can act quickly when he finds the vehicle he wants and the application process is straightforward relative to other loan types.
“We’ve been presented with two or three different ways of financing and this seems to be the easiest and most cost effective way,” says McIvor. “It’s definitely saved us money; the interest rates on these type of loans are a lot more competitive and once you have a line of credit in place, such as a master finance arrangement, it’s really quite quick to organise. You supply your invoice, sign in two or three places and it’s over in about two minutes. It’s been great that NAB has taken the time to understand our business and point us in the right direction, coming up with the options that are easiest and most economical for our business.”
About 80 percent of Victorian Touring Coaching’s business comes from schools and universities, so McIvor structures the loans to fit in with the school terms – cash flow tends to be tighter after the December-February school holidays so the loan repayments are scheduled over 11 months, enabling them to skip a payment in February.
Benefits of the balloon payment
Michael Cutting, Specialised Banking Executive at NAB, says the assets funded by these types of loans offer good security from the financier’s point of view. “There’s quite a liquid and deep secondary market in these assets, which means that at the end of the loan term, customers are very confident they’ll find a buyer to clear the remaining debt .“The customer knows that by using Equipment Finance with a balloon or residual they can reduce repayments during the term. Because we offer a fixed structured repayment they can set their contracts and budgets knowing the costs of their equipment each month,” notes Cutting.
Free up cash flow
One trend that’s been emerging in trucks, trailer and bus financing is that clients are looking for longer terms and using the balloon payments to reduce repayments. For example, if a customer bought a prime mover for $250,000 with the intention of selling it after four years for $100,000, net of sale proceeds the customer is only paying $186,000 across the life of the loan.
“Over the course of the loan that delivers $60,000 of cash flow back into the business providing money that can be used for growth or other running costs,” says Cutting. “A lot of businesses will be making 15-20 percent returns on their equity and if that money is freed up it can be used in cash-generating activities such as buying more stock or employing more people.”