Top 5 Machinery Finance Mistakes

Thursday 02 February, 2023

When it comes to buying machinery for your business, there are a few key things to keep in mind to avoid costly mistakes.

In this blog post, we’ll go over the top five common mistakes your business can make when it comes to equipment financing, so you can avoid them and keep your business and cash flow on track!

1. Not selecting the right type of finance to support your business growth

When you are considering financing business equipment, there are a variety of machinery finance options available, so it’s important to select the right type of finance that will meet both your short-term and long-term needs.

Many businesses fail to consider all the equipment financing options available to them. For example, if your equipment needs to be upgraded regularly or your business is new then a lease may be a better option than a long-term secured loan (commonly called a chattel mortgage).

Regardless of the equipment financing option, you choose, selecting a monthly payment you can comfortably afford will save your cash flow and support your business's growth.

2. Not having a realistic budget:

You should always know how much you can afford to spend before you start looking at machinery financing options. This will help you narrow down your choices and make sure you don’t overextend yourself financially.

Balloon Payments

If you are considering a financing option such as a chattel mortgage, this may include a balloon or residual payment. A balloon payment is an agreed amount you must pay the lenders at the end of the loan term. The amount of your monthly repayment will determine the amount paid. Generally, the lower the repayment, the higher the balloon payment will be.

A balloon payment can be a great option to keep your monthly costs down. However, you should consider the impact on your cash flow at the end of the loan term. Lenders may agree to a new loan to refinance the residual amount but in the long term, this could be far more costly.

As well as the ongoing monthly repayments, make sure you factor in all the costs associated with owning and operating the equipment, not just the purchase price.

3. Not Understanding the Cost of Equipment Ownership

You have decided on the right financing deal and know your budget. However, one of the most important things to understand when considering machinery finance is the cost of ownership. This includes not just the purchase price, but also ongoing costs like maintenance, repairs, and fuel.

This is one of the important aspects that businesses tend to overlook when buying equipment. So, make sure you have a clear understanding of all the costs associated with owning and operating the equipment before you make any decisions.

Decided on a Hire Purchase or Lease?

Have you decided that a lease or hire purchase arrangement is the best solution for your financial situation? Then you need to understand that equipment ownership does not transfer to your business which may limit the way you can use the machinery. For example, when leasing a vehicle, you may have restrictions on the number of kilometers you can travel or modifications you can make.

If you do not meet the restrictions of a hire purchase or lease, you may be required to pay a monetary penalty to the lender.

New Equipment vs Used Equipment -

Your business may be deciding between new and used equipment. Buying new equipment can be a big investment for your business and finances.

Investing in second-hand equipment can save money on your monthly payments, however, may lead to higher maintenance costs, and more downtime for repairs and the machinery may need to be replaced sooner. These factors may mean you end up paying more in the long run.

4. Purchasing unnecessary or unsuitable equipment:

Do your research before purchasing any equipment – make sure it’s right for your business needs! Investment in machinery that doesn’t suit your business's requirements can be costly.

Not only will you need to meet your monthly repayments, but you will pay additional money on interest and fees. The loan could also impact your credit rating and limit your ability to finance the equipment you need to make your business profitable.

5. Not talking to your finance broker to help you find the right finance option:

Before you decide on the right financing option for your business talk to a finance broker who specialises in equipment finance. They can explain the financing options available to your business and help you find the right loan to save you money.

A broker will be able to assist you through the process and help you select the best deal for your business needs. They can also provide valuable insights into any potential pitfalls so that you can avoid them altogether!

Speak with the Team at Finance Brokers Tasmania

If you have any questions when it comes to equipment finance, be sure to speak with one of our friendly team at Finance Brokers NSW. With over 36 years of experience and access to over 40 lenders, you can be guaranteed that our team of experienced brokers will find a financing option and lender to meet your needs.

With our expert guidance, we can help you avoid these five common mistakes and allow you to focus on the right machinery to help your business grow.