Equipment Finance: Cheapest payments are not always the best option

When you’re leasing equipment for your business, we’re fairly certain you’ll be breaking it down to the total cost vs the cheapest payments.

But what is the best option for you to focus on? We’re going to let you in on a few industry secrets about operating leases and rentals… you can thank us later.

Cheapest is not always the best

When referring to an operating lease, cheapest repayments are not necessarily the best option.

Cheapest repayments can mean quarterly payments that drive per diem payments upfront and inertia payments at the end of term. But what does this mean?

• Per diem payments are upfront fees charged per day for use of the assets prior to the contract starting on the next quarterly payment. This may seem reasonable however it is fees charged on top of the agreed contract that are often not considered or discussed

• Inertia Payments are those that the client is locked into at the end of term if the client does not declare their intent or return the goods on time. This can attract a minimum of one extra quarterly payment or lock the client in for 12 months depending on the T & C’s

You can mitigate the impact of per diem and inertia payments by considering the total cost of the finance contract and the deal structure that includes:

• Contract starts on the day of settlement not when the next quarter rolls around – no per diem payments

• Monthly repayments to ensure inertia payments are minimised with only 1 extra month charged depending on the clients end of term process

• Total cost of finance that includes all the extra charges (per diem and inertia payments) to compare apples with apples

Think about what you want at the end of the agreement

You may want to consider alternatives to an operating lease if your sole intention is to own the assets at the end of term. For this it may be better to utilise a rental, finance lease or chattel mortgage.

Be sure to chase your best finance option

Separate the hardware and finance supplier quotes to ensure that conflicts do not arise. Do not allow margin within hardware to be used as a smoke screen to buy down the rate of the finance. Get the best deal on the hardware, and then get the best option on the finance.

Not sure about the best option for you? Feel free to contact our equipment financing specialists for a chat.

Note: This article does not constitute advice. Please speak to your accountant should you require financial advice regarding your entity’s specific requirements.