Understanding the Basics of Earthmoving Equipment Finance

Earthmoving equipment finance allows a business to acquire machinery through structured repayments secured against the asset. This article sets out the principal structures, the cost implications and the matters a Canberra operator should consider before committing to a facility.

How Does Asset Finance Work for Earthmoving Equipment?

Asset finance is a lending arrangement in which a lender funds the purchase of equipment and holds the equipment as security until the debt is repaid. The borrower makes scheduled repayments over an agreed term, and ownership or residual obligations depend on the structure selected.

For machinery such as excavators, skid steer loaders, backhoes and rollers, the equipment itself usually forms the primary security. This is the principal feature that distinguishes asset finance from an unsecured facility, and it generally influences the pricing and terms a lender is prepared to offer. The same security arrangement carries a risk: if repayments cannot be met, the lender may repossess the asset under the terms of the contract.

Machinery is often supported by related facilities such as equipment finance, and transport requirements may call for heavy vehicle finance or trailer finance to move the plant between sites. Each facility should be assessed on its own terms.

Leasing vs Buying Earthmoving Equipment: Key Differences

Buying through a loan typically results in the business owning the machine at the end of the term, whereas a lease generally leaves ownership with the lender unless a purchase option is exercised. The appropriate choice depends on how long the machine will be used, how quickly it depreciates and how the business wishes to treat the obligation in its accounts.

The considerations in a leasing vs buying comparison generally include the following:

• Ownership at the end of the term, and whether a final payment (often called a balloon or residual) applies.
• The size of the monthly repayment relative to the business's cash flow.
• The total amount paid over the life of the facility, including interest and fees.
• Any restrictions on usage, hours or modifications under a lease agreement.

A balloon payment reduces the regular repayment but defers a lump sum to the end of the term, which must then be paid or refinanced. The tax treatment of each structure differs according to the business's circumstances. Applicants should obtain advice from their accountant before selecting a structure.

Repayment Illustration: How Loan Term Affects Total Cost

A longer term lowers the regular repayment but increases the total interest paid. The following example is illustrative only and uses an example rate of 6.75% p.a.

Consider a Canberra civil contractor financing a machine at $200,000 with no deposit, no balloon and monthly repayments. The contractor is weighing a five-year term against a seven-year term. Using the illustrative rate of 6.75% p.a. for both, the figures are as follows:

• Five years: repayments of approximately $3,937 per month, with total interest of approximately $36,200.
• Seven years: repayments of approximately $2,994 per month, with total interest of approximately $51,500.

The seven-year term reduces the monthly commitment by roughly $943, but it adds approximately $15,300 in interest. The contractor reviews projected monthly income from current contracts and concludes that the five-year repayment is serviceable. The shorter term is selected, and the machine is repaid sooner. Had cash flow been uncertain, the longer term would have offered a lower monthly obligation at a higher total cost.

Actual pricing varies according to the lender, the age and type of equipment, the deposit and the financial position of the borrower. An asset finance calculator can be used to test alternative terms before an application is lodged.

What Do Lenders Assess in an Equipment Finance Application?

Lenders assess the capacity of the business to meet repayments and the value and marketability of the machine being financed. The specific requirements differ between lenders and between products.

In general terms, a lender will consider the trading history of the business, its recent financial performance and existing debts. The equipment is also reviewed, including its age, condition and whether it is new or used. Lenders may value dealer and private-sale machinery differently and may apply their own conditions to either. The borrower's deposit, if any, may also affect the terms offered.

A broker can compare policies across a panel of lenders and present the application in a form that addresses these criteria. The business remains responsible for the accuracy of the information it provides.

Can You Refinance an Existing Equipment Loan?

An existing equipment loan can often be refinanced, subject to the lender's policy and the terms of the current contract. Early repayment may attract exit or break costs, which should be weighed against any anticipated benefit.

A business may consider a refinance business loan arrangement to adjust the repayment term, consolidate several facilities or release cash flow. Business refinancing extends the debt period in some cases, which can increase total interest even where repayments fall. Larger working capital needs may alternatively be addressed through business loans, depending on the security available.

OAUM Securities assists Canberra businesses in reviewing these options and preparing applications for earthmoving and related equipment. Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions