Many plant equipment finance problems can be avoided by making a few good decisions before you apply, such as matching the loan to the asset and choosing a suitable term. If you plan to buy machinery for your business, a few early decisions can keep your repayments manageable.
This article walks you through the common mistakes in a clear order, so you can check your plan against each one.
What Is Plant Equipment Finance and How Does It Work?
Plant equipment finance is a loan or lease that lets your business buy machinery and pay for it over time, instead of paying the full price upfront. The equipment usually acts as security for the loan, which can reduce the need to put up other assets.
The main trade-off is that you owe repayments whether or not the machine earns what you expected. Our asset finance and equipment finance pages explain the structures lenders commonly offer. The right one depends on your lender and your business financials.
Mistake 1: Choosing a Term That Outlasts the Equipment
A loan term should not run longer than the useful life of the machine. If it does, you may still be paying for equipment that is worn out or due for replacement.
A longer term lowers each repayment, but you usually pay more interest in total. A shorter term raises repayments and puts more pressure on monthly cash flow. The aim is a term that fits both the machine and your cash flow.
Mistake 2: Only Looking at the Repayment, Not the Full Cost
The repayment is only one part of the cost. Fees, the interest rate type, and any final payment at the end of the term all change what you pay overall.
As an illustrative example only, a $100,000 loan over 5 years at 6.75% p.a. with principal and interest repayments comes to roughly $1,968 a month. Over the term that is about $118,000 in total repayments. A final payment at the end would lower the monthly figure, but it leaves you with a large amount due later. You can test your own numbers with a repayment calculator before you commit.
Leasing vs Buying: Which Suits Your Business?
Buying means you own the equipment and carry the loan. Leasing usually means lower upfront costs, but you may not own the asset at the end. The right choice depends on how long you will use the machine and how your accountant advises you to treat it.
Tax treatment differs between the two, so speak with your accountant before you decide. No outcome is certain, as it depends on your circumstances.
Mistake 3: Leaving Out Running Costs and Cash Flow Gaps
A repayment that looks fine on paper can strain a business once servicing, insurance, fuel and downtime are added. Plan for the months when the machine is not earning.
Consider a landscaping business that wants to buy an excavator. The owner first looks only at the repayment and plans a short three-year term to save on interest. When the numbers include servicing, insurance and quieter winter months, the monthly cost is too tight. After talking it through, the owner moves to a five-year term and keeps a cash buffer for slow periods.
The outcome is a lower monthly repayment that fits the business's cash flow. The trade-off is paying more interest over the longer term, and the owner is comfortable with that because the business can carry the repayments in every season.
Mistake 4: Applying Without Knowing Your Borrowing Position
Applying to several lenders without checking your position first can leave extra enquiries on your credit file. It also leaves you guessing about what you can afford.
If you also have a home loan, business loan or other debts, lenders will look at all of them together. Our page on borrowing capacity explains how this works. If an existing loan is also weighing on your cash flow, it may be worth a loan health check before you add new debt.
Should You Refinance Existing Equipment Loans?
Refinancing can make sense if your current loan no longer suits your business, but it can also bring exit fees and new costs. Check these costs against any saving before you decide.
If you already hold equipment loans, ask what it would cost to move them and whether the new terms really suit you. Our refinancing page outlines how we look at this.
Mistake 5: Not Getting Help Before Signing
Loan contracts for equipment can include terms such as early repayment charges, balloon payments and security over other assets. Read them before signing and ask questions about anything unclear.
If some of the language is unfamiliar, our jargon translator puts common finance terms into plain English.
Step Ahead Finance can compare options from a range of lenders and walk you through each step in a clear order. Call one of our team or book an appointment at a time that works for you, and we will work through your equipment plans together.
Frequently Asked Questions
What is plant equipment finance?
It is a loan or lease that lets your business buy machinery and pay for it over time. The equipment usually acts as security for the loan.
Is leasing or buying plant equipment the right choice?
It depends on how long you will use the machine and your business finances. Buying gives you ownership, while leasing often has lower upfront costs. Speak with your accountant about tax treatment.
Should the loan term match the life of the equipment?
Generally the term should not run longer than the machine's useful life. A longer term lowers repayments but usually costs more interest overall.
Should I check my borrowing position before applying?
Yes. Knowing what you can afford helps you avoid unnecessary applications and choose a loan that fits your cash flow.
