How do lenders assess Equipment Finance?

When it comes to equipment finance there are generally three points lenders consider:

1. Who is the Borrower?

2. What is the Asset being purchased?

3. Which policy does your application fit under?  

As you can see there are a number of components that go into an application for Equipment Finance.

I can help you workout which is the simplest policy you qualify under and structure an affordable repayment at a competitive interest rate.

Who is the Borrower?

When it comes to you the ‘Borrower’ banks want to know things like:

·        How long you have been in business for?

·        What industry you operate?

o   This is because certain industries are considered high risk i.e. Hospitality, Construction and Mining services

·        How long you have been in business for?

o   The longer you have been in business i.e. more than 24 months the less risk you are as opposed to a Start-Up or New business

·        Have you had previous equipment loans and what was the conduct of the account?

o   Making sure that previous commitments we paid on time

·        Do you own property?

o   Primarily the reason lenders prefer to finance ‘asset backed’ business owners is a) they have equity in their property and should things ‘go bad’ they potentially have the resources to sell and pay down loans and b) the theory is property owners are more likely to ensure loan commitments are paid on time

What is the Equipment being purchased?

When it comes to equipment finance there are three (3) classifications of equipment:

1.     Primary – generally vehicles which are registered

2.     Secondary – generally things like construction plant & equipment and some manufacturing equipment

3.     Tertiary – generally every other asset/equipment that is not classified as Primary or Secondary.

Primary and Secondary are deemed as less risky, generally because the equipment is general in nature and there is an established second-hand/resale market in the event the lender has to sell the equipment to repay a loan.

Therefore, lending criteria is simplified for new/used purchases through a recognised supplier/dealer. Private sale can be done but additional criteria is required.

Tertiary assets generally have low to no resale value which is why there is more scrutiny in the application process and financials are required.

Finance for used tertiary equipment can be tough with most major lenders. There is a variety of non-bank lenders who finance ‘core tertiary equipment’ however as they understand this equipment is a necessity for you to operate.

The age and type of an asset also determine the maximum loan term. The ATO sets out the ‘Effective Life’ ruling for assets based on Industry and Assets Type.

Click this link to view ATO Income tax: effective life of depreciating assets (applicable from 1 July 2019)

Lenders determine a loan term based on the age of the asset at term end and in accordance with the ATO Effective life of that specific asset.

For example:

·        John buys a 2015 Commercial Van and wants to finance it.

·        The vehicle is 5 years old and the ATO effective life is 10 years. Therefore, the maximum loan term can be 5 yrs.

·        If John was buying a 2013 model then the maximum loan term is 3 years.

Please note terms vary from lender to lender.

Which Policy does it fit under?

There are three (3) main policies that equipment finance (all assets classes) fall into but will vary from lender to lender.

1. Express Policy - No Financials

2. Replacement Policy - No Financials

3. Full Application Policy - Full Financials

Express Policy

• Primary and Secondary goods only

• New equipment purchased through dealer or recognised supplier (for vehicles can be up to 3 years old)

• Amounts up to $250,000 (specific to each lender) but some capped to $150,000

• No Financials, Bank Statements or ATO Statements required

Replacement Policy

• Primary and Secondary goods only

• Where a business is replacing an asset currently under finance or paid out within the last 6 - 12 months.

• New repayment is no more than 25% greater that the repayment it replaces i.e. old repayment $1,000 per month, replacement loan repayment no > $1,250 per month

• No Financials, Bank Statements or ATO Statements required

Full Application Policy

• Tertiary assets and Primary, Secondary assets that don’t meet Express or Replacement policies i.e. Used purchased Private Sale

• Two Years Financials required + ATO Statements

• Valuation may be required for asset; lending for used equipment generally capped at 90% of Auction Value (may be up to 110% for Primary Goods)