Hire and Rental News - February 2016

42 / 60

The hidden dangers of concentration
risk
Many business owners are blissfully
unaware financing equipment through
their existing bank usually has that
equipment debt ‘bootstrapped’ to any
other securities the bank may hold (such
as properties and other owned assets
within the business). This bootstrapping
typically comes in two forms:
• Cross Collateralisation Clauses (which
sees all debt with the bank secured by
all security held by the bank);
• General Security Agreements (GSA)
which is the new term for the old Fixed
and Floating Charges or Registered
Equitable Mortgages (REM), which
means the bank owns all assets of the
business under this GSA.
Typically the banks do not go out of their
way to tell business owners about these
overarching securities, however it is most
often the reality and a simple company
search will tell a business owner if a GSA
is in place over their business.
Finally, the sleeping dragon in this
situation most often rears its head when
a business looks to change banks and the
outgoing bank insists upon all equipment
finance being paid out and the penalties
incurred on contracts which are early to
mid-term at that point. As an indication
of those penalties, the cost to terminate
a $1 million equipment loan which is
one year into a five year transaction is
typically in the order of $40,000.
In a world where there are a dozen or so
competitive banks and financiers keen
to finance equipment in its own right
without this bootstrapping, a company’s
existing bank is probably the worst place
to have their equipment debt.
The existing bank does have a role
to play in funding working capital
such as overdrafts as well as property
based requirements and under these
circumstances, the bank having the
benefit of property equity via mortgages
over properties is completely relevant and
commercially acceptable.
The provision of a GSA to a bank should
only ever be granted by a business as a
last resort as it is in effect the granting
of a mortgage to the bank over the entire
company.
Getting equipment finance right
By Miles Beamish – Senior Business Finance Broker – Finlease
Spreading the risk
Many businesses spread their equipment
debt across three or four financiers
because this creates a stable platform of
supportive lenders for future growth as
well as creating competition between
those financiers to ensure competitive
structures and rates are provided. This
can be done by the client or through the
use of a capable finance broker.
Remember, these lenders have no other
asset as hard security other than the
equipment they have financed.
The true effect of interest rates
In this increasingly competitive
environment where business owners are
constantly squeezed on margins, any
saving in expenses is beneficial.
Based on a simple $1 million debt over a
five year term, this is worth noting:
• At 5.5% the payments are $19,100p/m;
• At 4.5% the payments are $18,645p/m.
The difference of $455p/m over the
60 month term is $27,300.
To put this into perspective, where a
business has a net profit margin of 5%, an
additional $546,000 in turnover is required
to offset this additional $27,300 cost, so
attention to the cost of finance is always
a worthwhile exercise.
Dispelling the myths
Refinancing existing equipment debts
towards the latter part of the existing
contracts (in the last 12–18 months) can
be done through an increasing number
of financiers. There are minimal penalties
involved to do so at this later stage, the
current interest rates would typically
be around 2% less than the initial debt
and the refinancing of those existing
debts on long-term assets will usually
substantially reduce the existing monthly
commitments and in doing so free up
cash flow which can cover in part the
cost of additional equipment.
Equipment finance can be written with
payments monthly in arrears to allow a
30 day payment delay to assist cash flow.
The cost differential between monthly
in advance and monthly in arrears is
minuscule.
Example on $1 milion over five years:
• Monthly in advance $18,573p/m;
• Monthly in arrears $18,645p/m.
Used equipment including private
sales can easily be financed, saving
businesses significant dollars on the
cost of equipment. Care does need to
be taken around ensuring clear title on
private sale assets, including company
searches on the vendor to ensure there
is no dedicated debt on the asset or
overarching GSA by their bank. A
simple PPSR search will show up on any
interests held on those assets being sold.
Major refurbishments of existing plant
can also be financed on a term equipment
debt, no different to repowering the
engines of an aircraft where the value
of the aircraft is substantially increased
through this process.
Choosing the right structure (CHP V
Chattel Mortgage)
Beware of the pitfalls of Ad Valorem
Stamp Duty which has been abolished in
all states except NSW. Those businesses
in NSW can incur this unnecessary stamp
duty expense through the use of a Chattel
Mortgage instead of Commercial Hire
Purchase (CHP).
Stamp duty on a $1 million machine
under chattel mortgage is $3,941 (add this
to the cost shown above in interest rates
and the dollars are starting to add up).
This cost is not incurred through CHP
and although there is GST payable on the
interest component of CHP, the GST is a
refundable expense.
Choosing the right term and
residual/balloon
Business owners should ensure the
term and residual/balloon they want on
their long-term assets is the structure
that suits them and not what the bank
dictates. The same applies to deposits
and GST. There are many competitive
lenders out there so business owners
should shop around until they get the
right structure.
Being forced to pay off a $1mil asset
(which has a 10 year plus lifespan) over
five years at $18,645p/m maybe too
heavy on cash flow. Perhaps a five year
term with a 40% balloon at $12,865p/m
followed by the refinancing of that
$400,000 balloon over a subsequent five
years at $7,460p/m is a better outcome.
Contact Miles on: 0410 774 506 or email:
HIRE AND RENTAL NEWS • FEBRUARY 2016 42
BUSINESS MANAGEMENT